South Asia’s Turn South Asia’s Turn Policies to Boost Competitiveness and Create the Next Export Powerhouse Gladys Lopez-Acevedo, Denis Medvedev, and Vincent Palmade, Editors © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 20 19 18 17 This work is a product of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Contents Foreword .....................................................................xi Acknowledgments .............................................................xiii Abbreviations .................................................................xv Overview ...............................................................1 With some exceptions, South Asia has reaped few benefits from global integration .......1 Productivity is the key to improved competitiveness ...............................2 Business environment challenges remain a constraint on firm performance ..............3 Growth of the region’s cities and clusters offers multiple opportunities to raise firm productivity ..............................................................4 Increasing prominence of global value chains provides a pathway to greater efficiency .....4 Improving firm capability and leveraging technology can substantially raise firm productivity ..........................................................6 Faster growth of exports and jobs is within reach if productivity improves ..............7 Policies to boost competitiveness and productivity ................................7 Reference ................................................................9 Part 1 SOUTH ASIA’S COMPETITIVENESS CHALLENGE AND OPPORTUNITY 1 The Region’s Competitiveness Potential Remains Largely Unrealized ................13 Pockets of excellence are evidence of vast untapped potential .......................14 Difficulties in attracting investment and penetrating global markets ..................14 Little progress in diversifying the merchandise export basket .......................18 Elusive sophistication and low quality of exports ................................19 Annex 1A ..............................................................26 Notes. 28 References ..............................................................29 v vi CONTENTS 2 Improving Competitiveness Requires Raising Productivity Rather Than Keeping Costs Low ..................................................31 Macro challenge: Contribution of TFP to growth is low and declining ................32 Sectoral challenge: Slow pace of structural transformation .........................34 Firm challenge: Firm growth is low and resources are trapped in small firms ...........35 Four case studies of important industries in South Asia ............................42 Annex 2A ..............................................................44 Notes. 46 References ..............................................................47 Part 2 PRODUCTIVITY PERFORMANCE: FIRMS AND LINKAGES 3 Business Environment Challenges Continue to Weigh on Firm Performance ...........51 Industry Case Study A: Industry-specific business environment issues in agribusiness ..............................................57 Note ..................................................................61 References ..............................................................61 4 Productivity-Boosting Agglomeration Economies Are Underleveraged ...............63 Economic activity in South Asia is highly concentrated ............................63 Agglomeration economies raise firm productivity ................................65 Resources do not flow easily to more-productive firms ............................68 Industry Case Study B: Better cities and trade logistics are needed for the electronics sector to thrive ..................................................70 Notes. 76 References ..............................................................76 5 Limited Success in Linking to Global Value Chains ..............................79 GVC participation supports productivity ......................................79 South Asia’s success in global and regional GVCs is limited to apparel ................82 Most policy determinants of GVC participation are lacking ........................88 Industry Case Study C: The effect of trade barriers on the apparel sector ..............91 Notes. 97 References ..............................................................97 6 Firm Capabilities Are Constrained ..........................................101 Firms lack managerial quality and do not use resources efficiently ..................101 Adoption of knowledge and technology is low .................................103 Innovation is widespread but novelty is limited .................................108 Returns to innovation are high .............................................113 Annex 6A .............................................................115 Industry Case Study D: Protection from global good practices limits the spread of world-class firm capabilities in the automotive industry ..........................117 Notes. 124 References .............................................................125 CONTENTS vii Part 3 THE WAY FORWARD 7 Potential for Increased Growth through Policy Reforms .........................131 Macro benefits: Faster export growth through higher productivity ..................131 Sectoral benefits: More jobs, higher earnings, greater inclusion .....................133 Firm benefits: Greater density of successful firms ...............................137 Annex 7A .............................................................139 Notes. 142 References .............................................................143 8 Need for Greater Emphasis on Trade Policies, Spatial Policies, and Firm Capabilities .... 145 Policies to better connect to global value chains ................................145 Policies to maximize agglomeration benefits ...................................149 Policies to strengthen firm capabilities ........................................153 Lessons from the four industry case studies: Drivers and constraints of competitiveness as seen by the managers of leading firms .........................157 Notes. 160 References .............................................................160 Boxes 2.1 Barriers