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By Amit Jain

Not only has it failed to arrest the spread of COVID-19, it has also failed to turn around a sagging economy. The wind appears to have gone out of its sail. Unemployment is rising. Graduates entering the workforce find the jobs they prepared for no longer exist.

According to the International Monetary Fund, India will see more than 40 million citizens slip back into extreme poverty this year as its economy shrinks by 10.3%. If that was not all, India lost 20 soldiers killed in hand-to-hand combat with Chinese troops. Yet nothing has been more bruising to India’s national pride than the news that its per capita gross domestic product is set to fall below that of Bangladesh. That has come as a rude shock.

People of my generation born shortly after Bangladesh was created in 1971, saw the country as a poor “cousin” living on financial aid. But that distorted image shrouded its slow but steady progress. In less than thirty years, Bangladesh increased average life expectancy at birth by 14.1 years, reduced extreme poverty by more than half, and increased per capita income threefold.

When I first visited Bangladesh in 1999 it had already scored its first success over poverty with microfinance helping scores of women become entrepreneurs. The telecom sector was booming and even the condition of its roads had improved. Politics was still messy but Bangladesh was getting some things right.

First, it allowed civil society to step in where the state was failing. Second, it made the workplace safe for women. Third, and most notably, it nipped terrorism in the bud. Such factors combined with a spell of macroeconomic stability has allowed light manufacturing to flourish. Bangladesh now exports 7% of the world’s apparel and footwear.

A value chain is the series of stages in the production of a good or service where each stage adds value to the previous one. When it takes place across borders it becomes a global value chain. By focusing on an activity where it had the widest margin of competitive advantage, Bangladesh succeeded in creating what India has largely failed to do — mass formal employment.

Garment factories now employ over 3.6 million workers of who, more than half, are women. Wages may be low but for those working in Bangladesh, such jobs offer the kind of income, dignity, and security that informal work does not. This became vividly apparent in March when Indian Prime Minister Narendra Modi declared a nationwide lockdown in response to the coronavirus pandemic and unwittingly triggered an exodus of daily wage migrants from urban centers.

As transport came to a standstill thousands were forced to make the long march home in desperation. Their plight makes a strong case for India to accelerate manufacturing. But it cannot do so by relying mostly on promotion campaigns. If Modi’s Make in India policy is to succeed, it needs to start with creating conditions in which low-margin mass manufacturing can move millions into formal employment in the shortest frame of time.

But can India replicate Bangladesh and turn value chains into vehicles for job creation? Yes, it can. Take eastern India, where most daily wage workers come from. It has long been a drag on India’s development performance.

Bihar, West Bengal, and Assam are among the poorest, least industrialized, and most densely populated states of India. If they could be turned into engines of economic growth, India could catch a second wind. This will require doubling down on something that people in such places can do better than anyone else.

The region that straddles present-day Dhaka once produced the finest Muslin cloth the ancient world had ever seen. Flaunting it was a statement of taste and luxury. When Bangladesh began stitching for high street fashion it brought an ancient craft into modern life. Perhaps, there is something here to learn from.

Dhaka enjoys preferential tariff treatment from its buyers and a narrow wage rate advantage over India. But as it inches toward becoming a middle-income country it will begin to lose that advantage. At some point shifting garment manufacturing to India may become viable. This is referred to as the flying geese phenomenon. Easing trade with Bangladesh could accelerate that process.

Sadly, under Modi, India has shown little appetite for that. It has instead raised import duties. Yearly trade between the two is barely $10 billion. Traders struggle with delays. Goods need to be unloaded and reloaded at border checkpoints. India has recently pulled out of a regional trade bloc championed by Japan, a strategic partner that Modi has wooed. That is a pity. The spillover impact that Japanese investments in Bangladesh could have on eastern India is extraordinary.

Tokyo has already put $390 million at stake. It is now helping construct a four sq. km Special Economic Zone near Dhaka. If successful, India could lose out as a new manufacturing hub for Japanese companies in South Asia. The best chance of unlocking the economic potential of India’s impoverished east is climbing a job-creating value chain and closer economic integration with Bangladesh.

Amit Jain is a Singapore-based consultant who helps clients navigate frontier markets and fragile states. 

South Asian Monitor