Vietnam seems to be the consensus pick for winner of the U.S.-China trade war, as Chinese and other manufacturers shift production to the cheaper Southeast Asian nation. If there’s a loser, at least in terms of missed opportunities, it may be the countries of South Asia.
To understand why, remember that the trade war has only accelerated an important trend a decade in the making. Faced with rising costs, Chinese manufacturers must decide whether to invest in labor-saving automation technologies or to relocate. Those choosing the latter present an enormous opportunity for less-developed countries, as Chinese companies can help spark industrialization and much-needed economic transformation in their new homes.
There may not be another such chance this generation. The only proven pathway to long-lasting, broad-based prosperity has been to build a manufacturing sector linked to global value chains, which raises productivity levels and creates knock-on jobs across the whole economy. This was how most rich nations, not to mention China itself, lifted themselves out of poverty.
Yet the evidence suggests that South Asian countries are lagging behind in attracting manufacturing investment. It’s not just Vietnam that’s racing ahead. African countries, too, are making manufacturing a top priority. Ethiopia alone has opened nearly a dozen industrial parks in recent years and set up a world-class government agency to attract foreign investment. The World Bank has lauded sub-Saharan Africa as the region with the highest number of reforms each year since 2012.
By contrast, in terms of foreign direct investment as a percentage of GDP, South Asia lags both the global average for least-developed countries and sub-Saharan Africa. While South Asia’s total GDP is more than 70% greater than Africa’s, the continent received three-and-a-half times the investment from China that South Asia received in 2012, the most recent year for which the United Nations has published bilateral FDI statistics. In the last five years, the American Enterprise Institute’s China Global Investment Tracker has recorded 13 large Chinese investment deals in Africa and only nine in South Asia.
Bangladesh is a striking illustration of the problem. The country needs to create 2 million jobs per year at home just to keep up with its growing population. Yet, despite a world-class garments manufacturing sector, it seems unable to cut red tape and enact the reforms needed to attract investment to diversify beyond apparel. In the past few years, Bangladesh has fallen to 176 out of 190 countries in the global Ease of Doing Business country rankings. DBL Group, a Bangladeshi company, is investing in a new apparel manufacturing facility that will generate 4,000 jobs — in Ethiopia.
The fantasy, most common in India, that a country might somehow “leapfrog” from a rural, agriculture-heavy economy straight to a services-based economy is just that: a fantasy. South Asia can’t afford to lose this chance to grow its manufacturing sector.
Attracting manufacturing investments will require, first and foremost, that governments in the region acknowledge the competition is passing them by. India, for example, must abandon its overconfidence that investors will come simply for its large population. Pakistan needs to stop relying on its government-to-government friendship with China. Chinese state financing of infrastructure won’t automatically lead to manufacturing investment, most of which is dominated by private Chinese companies motivated by competitive forces, not government diktats.
Secondly, South Asian countries need to undertake a concerted, whole-of-government push to boost investment levels. Specifically, they need to create the conditions manufacturers need to thrive, from steady power supplies to efficient port operations and customs clearance.
Moreover, they need to understand the specifics of these businesses. Factories have unique requirements depending on what they make. For example, cloth and clothing factories, despite their seeming similarities, have extremely different requirements: The former is capital-intensive, with huge amounts of power-hungry machinery churning out bolts of cloth, whereas the latter is labor-intensive and features rows of workers cutting and sewing.
Countries need to analyze which manufacturing sub-sectors they are best positioned for, meet the requirements those manufacturers have in order to set up shop, and target the regions of China (and elsewhere in the world) where those types of manufacturers are to be found.
The good news is that all of these measures are eminently feasible. And in many cases, the first steps are already being taken, such as with the construction of Bangladesh’s first deep sea port at Matarbari. The bad news is that unless South Asia moves faster, others may have already seized the opportunity to industrialize. – Bloomberg
Also read: US-China trade war keeps global manufacturing stuck in a slump
African countries don’t have much manufacturing, and neither does Vietnam. This author doesn’t seem to know what makes a true manufacturing economy.
I love this article. What tips & advice would you give newbies in power that are ‘illetrate’ when it comes to how to invest, economics, & industrialization, within these sought-after developing countries such as Ethiopia? on how would you guide them to invest and take advantage of these manufacturers etc.?
If you make a move, will you b dumb enough to move to a country that has 87-90 holidays per year?? Productivity? what is that?
No developed country in the world has attained its elevated status w/o manufacturing. Yet India keeps on pushing IT and service sector. You iron my shirt and I will check your health kind of barter exchange. Hope the ISA gurus repeat after me. No manufacturing, no development for you.. Got it????
Factors such as labor and capital productivity, infrastructure and environmental clearances are critical to the manufacturing sector, but the most significant is technology. Technology will play a major role to not only improve efficiency, productivity and quality, but also cut costs and reduce material expenditure and energy consumption. Adoption of ERP (Enterprise Resource Planning) in manufacturing has matured after decades of investment and all the departments from production and sales to operations and finance are connected by a common IT enabled platform, thus giving an integrated view of operations to the company’s management. The SMAC technologies will further add to the transformation of the manufacturing sector. SMAC is the concept that makes use of social interactions, mobility, analytics driven by big data and cloud technology to simplify the customer experience while boosting productivity. As many manufacturers don’t have large IT departments, employing each of SMAC’s four components is a good way to propel production toward growth and increased efficiency.
Good article! Maybe, the author could inform us with industry-specific requirements and details of all bureaucratic hurdles for relocation of those birds migrating from China in a series of India-specific articles. It may seem obvious, but some in power can be totally clueless. So, the author may want to zoom in.