Fri, Oct 11, 2019 - Page 9 News List

South Asia risks losing its place as the world’s next factory

The region has fallen behind to Africa and elsewhere in the race to attract manufacturing investment

By Irene Yuan Sun  /  Bloomberg

Illustration: Mountain People

Vietnam seems to be the consensus pick for winner of the US-China trade war, as Chinese and other manufacturers shift production to the cheaper Southeast Asian nation. If there is a loser, at least in terms of missed opportunities, it might 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 could help spark industrialization and much-needed economic transformation in their new homes.

There might 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 is not just Vietnam that is 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 (FDI) 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 percent 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 UN 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 would 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 cannot afford to lose this chance to grow its manufacturing sector.

Attracting manufacturing investments would 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 would come simply for its large population.

Pakistan needs to stop relying on its government-to-government friendship with China. Chinese state financing of infrastructure would not automatically lead to manufacturing investment, most of which is dominated by private Chinese companies motivated by competitive forces, not government diktats.

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