Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

Economic lessons from Vietnam and Bangladesh

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Lessons from Bangladesh and Vietnam for Indian economy

The article examines the emergence of Bangladesh and Vietnam as the major export hubs in the world and explains the lessons India could draw from it.

Context

  • Bangladesh has become the second-largest apparel exporter after China.
  • Vietnam’s exports have grown by about 240% in the past eight years.

Analysing Vietnam’s success

  • An open trade policy, a less inexpensive workforce, and generous incentives to foreign firms contributed to Vietnam’s success.
  • Vietnam’s open trade policy through Free Trade Agreements (FTAs) means trading partners do not charge import duties on products made in Vietnam.
  • Vietnam’s domestic market is open to the partners’ products.
  • Vietnam has agreed to change its domestic laws to make the country attractive to investors.
  • 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.

What explains Bangladesh’s success?

  • 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.
  • India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
  • Bangladesh may not have this facility in four to seven years as its per capita income rises and it loses the LDC status.
  • Bangladesh is working smartly to diversify its export basket.

Lessons for India

  • The key learning from Bangladesh is the need to support large firms for a quick turnover.
  • Yet, most of Vietnam’s exports happen in five sectors, in contrast, India’s exports are more diversified.
  • 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.
  • To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces.
  • There should be no need to search for land or obtain many approvals.

India should pursue organic growth

  • Most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere.
  • In such cases, national exports look large, but the net dollar gain is small. China also faces this issue.
  • Country’s Export to GDP ratio (EGR) indicates its export capacity.
  • Vietnam’s EGR is 107%, such high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty. 
  • 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.
  • 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.

Consider the question “While export is essential for the growth of the country, over-dependence on it and its promotion at the expense of the other sectors could do more harm to the economy than good. Comment.” 

Conclusion

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 without increasing its dependence on export.

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