Vietnam and Bangladesh are on a roll. While Bangladesh has become the second largest apparel exporter after China, Vietnam’s exports have grown by about 240% in the past eight years. What has helped them? And what can India learn from them?
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 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.
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.
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. Sadly, 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. India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
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. Which elements of Vietnam and Bangladesh models should India emulate?
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. 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. 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.
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. China also faces this issue.
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. 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.
Ajay Srivastava is an Indian Trade Service officer. Views are personal
