Vietnam and Bangladesh are on a roll.
Bangladesh has become the second largest apparel exporter after China, Vietnam’s exports have grown by about 240% in the past eight years.
Two nations and their success stories:
An open trade policy, a less inexpensive workforce, and generous incentives to foreign firms contributed to Vietnam’s success.
Vietnam and Bangladesh have gained enormously from trade. Trade has created wealth and employment and lifted millions above the poverty level in less than two decades.
Vietnam pursues an open trade policy mainly through Free Trade Agreements (FTAs) which ensure that its important trading partners like the U.S., the EU, China, Japan, South Korea and India do not charge import duties on products made in Vietnam. Vietnam’s domestic market is open to the partners’ products. For example, 99% of EU products will soon enter Vietnam duty-free.
Success story of Vietnam:
- Vietnam has agreed to change its domestic laws to make the country attractive to investors.
- Foreign firms can compete for local businesses. For example, EU firms can open shops, enter the retail trade, and bid for both government and private sector tenders.
- They can take part in electricity, real estate, hospital, defence, and railways projects. This model may not be good for India as it offers no protection to farmers or local producers from imports.
- Vietnam being a single-party state can ignore domestic voices.
- Over a decade or so, large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have flocked to Vietnam to manufacture their products.
- Last year, Vietnam received investments exceeding $16 billion. As a result, Vietnam’s exports rose from $83.5 billion in 2010 to $279 billion in 2019.
Success story of Bangladesh:
In Bangladesh, large export of apparels to the EU and the U.S. make the most of the country’s export story.
The EU allows the import of apparel and other products from least developed countries (LDCs) like Bangladesh duty-free.
Bangladesh is working smartly to diversify its export basket. India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
Vietnam and Bangladesh models can emulate in India:
The key learning from Bangladesh is the need to support large firms for a quick turnover.
Large firms are better positioned to invest in brand building, meeting quality requirements, and marketing. Small firms begin as suppliers to large firms and eventually grow.
Vietnam has changed domestic rules to meet the needs of investors. Most of Vietnam’s exports happen in five sectors which has helped increase its growth in trade.
In contrast, India’s exports are more diversified which are slow to grow but nevertheless provides resilience to global shocks in long term.
To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces.
A firm should walk in to start operations in a few weeks. There should be no need to search for land or obtain many approvals.
Focus on organic economic growth:
Should a country promote trade at the expense of other sectors?
To understand this, let’s look at the export to GDP ratio (EGR). Vietnam’s EGR is 107%.
Such high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty.
The EGR of large economies/exporting countries is a much smaller number. The U.S.’s EGR is 11.7%, Japan’s is 18.5%, India’s is 18.7%.
Even for China, with all its trade problems, the EGR is 18.4%. Most such countries, including India, follow an open trade policy, sign balanced FTAs, restrict unfair imports, and have a healthy mix of domestic champions and MNCs.
The Economic Complexity Index (ECI), which ranks a country based on how diversified and complex its manufacturing export basket is, illustrates this point.
The ECI rank for China is 32, India 43, Vietnam 79, and Bangladesh 127. India, unlike Vietnam, has a developed domestic and capital market.
Diversification of Exports: Industry-specific Exports includes:
- Textiles and garments sector: modification in labour laws (like the Industrial Disputes Act, 1947) to remove the limitation on firm size and allow manufacturing firms to grow.
- Medical tourism: Setting up of a pan-India tourism board to promote medical value tourism. Simplification in the medical visa regime.
- Agriculture exports: abolishing Essential Commodities Act and the APMC (Agricultural Produce Market Committee) to promote agricultural export.
- Medical sector: a single ministry for medical devices and separate regulation for this sector.
- While this could revive the global economy, the challenge for India is to secure its GDP growth amidst such readjustments.
- Reforms to ease logistical constraints to exports should continue, rather than merely pursuing a sort of ‘race to the bottom’.
- India must move up from low-productivity sectors by improving the quality of its human capital.
- There is a need to further focus on new products like food commodity so that the growth is more resilient and sustainable. Also, it will cushion our exports from the global volatility and shocks in the long run.
While export remains a priority, it is not pursued at the expense of other sectors of the economy.
The focus is on organic economic growth through innovation and competitiveness.
With reforms promoting innovation and lowering the cost of doing business, India is poised to attract the best investments and integrate further with the global economy.