Topic: General Studies 2, 3:
- Effect of policies and politics of developed and developing countries on India’s interests
- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Lessons from Vietnam and Bangladesh
Context: Bangladesh has become the second largest apparel exporter after China, while Vietnam’s exports have grown by about 240% in the past eight years.
Reason for Vietnam’s success story
- A less inexpensive workforce
- 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
- Domestic laws modified to attract foreign firms: 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.
- FDI linked export strategy: In 2019-20, 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.
- India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
- Sadly, Bangladesh may not have such advantages 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.
Which elements of Vietnam and Bangladesh models can India emulate?
- Supporting Large firms: 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.
- Focus on Specific Sectors to kick start trade: 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.
Vulnerabilities in Vietnam’s growth model
- High 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%
- Lack of Organic economic growth: The quick build-up of exports in Vietnam resulted from large MNC investments. But most of its 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
- 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.
- Even if India follows an Open Trade Policy, it should have a healthy mix of domestic champions and MNCs.
- While export remains a priority, it should not be pursued at the expense of other sectors of the economy.