India vs. Bangladesh on the economy – How frequent comparisons in the media lack context
Over the past few years, the Indian media has been obsessed with comparing the economies of India and Bangladesh.
For a time, Bangladesh overtook India in terms of per capita income. This data point led to frenzied media commentary on how India should have learned the right lessons from Bangladesh’s meteoric economic rise.
As the world was in the throes of a pandemic, followed by the conflict in Ukraine, the rough macroeconomic edges of many countries emerged. Bangladesh was one of them.
The government of Bangladesh had to consider contacting the International Monetary Fund (IMF) to extricate the country from an unfavorable balance of payments situation, aggravated by prohibitive global energy costs.
So how did a country that was the star of economic miracles just before the pandemic have to turn to the IMF to survive?
In particular, how did a country whose strength was exports find itself faced with a balance of payments problem?
The answers lie in premature proclamations of Bangladesh’s economic miracle.
To be sure, Bangladesh is most certainly a smashing economic success. From a gross domestic product (GDP) of $4 billion in 1960, it has reached a peak of $416 billion in 2021, an increase of around one hundred in 50 years, a solid performance.
Per capita income reaches $2,500, higher than in India. Bangladesh has an annual export base of nearly $50 billion, a very good export to GDP ratio of 12%.
And yet, these figures do not give the complete picture.
Bangladesh has become an export powerhouse largely due to a textile success story. It has remained a one-trick pony, as its textile exports account for almost 70% of total exports. Sector allocation was very weak despite a two-decade trail of export growth.
Even in textiles, Bangladesh exports low-end, low-margin products with little expertise in more complex areas like technical textiles or textile machinery. The successful dominance of the global low-end textile market has not translated into significant labor productivity and an associated shift in the wage curve.
At least, for now, Bangladeshi export success has neither breadth nor depth. This superficial growth has been revealed as inelastic exports – energy, consumer goods, agricultural inputs and food grains – have become more expensive due to the twin inflationary phenomena of the pandemic and the war.
Some additional research on textile markets highlights another difference between the export situation of India and Bangladesh.
India accounts for 40% of US textile imports and has been the number one or number two supplier for most of the past few years. However, when it comes to the European Union (EU), India only has a 10% market share and ranks relatively far from fourth to sixth, with Bangladesh, Pakistan and Turkey consistently ahead of India. .
In fact, Indian textile exports have been declining at a compound annual growth rate (CAGR) of 5% to Europe during the period 2014-2020.
Why is India able to outperform its rivals in the United States (US) but not in Europe?
The answer lies in an age-old feature of world trade known as the Generalized System of Preferences or GSP.
Members of the General Agreement on Tariffs and Trade (GATT) have decided to allow a generalized, non-discriminatory and non-reciprocal system of tariff preferences granted by some members to others, departing from the principle of most favored nation.
The idea was that richer countries could allow developing countries to have better market access through preferential tariffs. The United States as well as the EU have had their own version of this program since the 1970s.
While a member may make adjustments to its programs, periodically changing beneficiary countries and product coverage, developed countries continue to offer GSP to least-developed countries or LDCs.
While India has been excluded from various GSP categories by some developed members of the World Trade Organization (WTO), the successor to GATT, Bangladesh continues to enjoy GSP benefits.
This has led to an 8-12% tariff advantage for Bangladesh in EU markets. For low-end textiles, this is a decisive difference because the margin on these products itself may be lower than the tariff advantage with Bangladesh.
Simply put, India may not be able to compete with Bangladesh for basic textile products in markets where Bangladesh enjoys GSP benefits unless Indian value chain participants decide not to. make no profit. It is clearly untenable.
Bangladesh has been designated to graduate from LDC status in 2026 by the United Nations. From the comments one reads about Bangladesh, it would seem that the transition from an LDC to a developing country would instil a sense of pride and confidence.
Yet ever since the possibility of a change in Bangladesh’s position emerged, the country has fought at the WTO to retain its GSP benefits for LDCs.
At the February meeting of the General Council of the WTO, the minutes of which are available in document “WTO/GC/M/196” on the WTO website, the Ambassador of Bangladesh pleaded on the proposed reclassification of LDCs:
“There are several unilateral LDC-specific GSP schemes where there are procedures to extend LDC trade preferences to graduating countries for a certain period… It is up to the preference-granting members how they want to consider the extension from their LDC-specific unilateral regimes to the same Members for a defined period after graduation… What we are asking for is best effort.
This is not an isolated case. Bangladesh has argued for maintaining its GSP benefits for nearly four years at the WTO. Members like the US and the EU are not too keen on letting graduating LDCs operate on GSP benefits.
In fact, India has established itself as a steadfast champion of LDCs on this agenda, as the General Council meetings show. India also offers “duty-free and quota-free” access to its own markets to all LDCs.
This situation shows that even very high economic growth alone may not be sufficient to counter exogenous shocks. The balance of payments situation requires fine macroeconomic management and a broad and diversified economy to take advantage of.
The Indian government and the Reserve Bank of India have shown that they use cyclical and countercyclical measures to manage external shocks. India also remains vulnerable to protracted global problems that are less severe than its neighbours.
From India’s perspective, the ongoing FTA negotiations with the UK and the EU are becoming important. Once the tariff reductions on textiles and other labour-intensive industries are negotiated, Indian companies will most certainly gain market share – mainly from Bangladeshi companies – in these markets.
Sovereigns can and should always learn from each other. But learning expectations should be based on real-world data analysis and a holistic view of relative competitive advantages. This is the lesson to be learned from the growth stories of India and Bangladesh.