Fragmentation Trade and Vertical Specialisation: How Does South Asia Compare with China

Abstract This article analyses the trends and patterns of export and fragmentation trade by South Asian countries—Bangladesh, India, Pakistan and Sri Lanka. To place the discussion in a comparative perspective, the analysis also covers China. Experience of China and other East Asian countries shows that export-led industrialisation and a high degree of participation in global production networks/value chains, based initially on specialisation in labor-intensive activities, are crucial for sustained employment generation and poverty reduction. However, exports have not become a major engine of growth in South Asian countries. An important reason for this is that South Asia has been locked out of the global production networks/value chains in several industries, except Bangladesh and Sri Lanka in readymade garments and India in automobiles. India’s export basket is biased towards capital- and skill-intensive products, which is an anomaly as the country’s true comparative advantage lies in unskilled labor-intensive activities. We argue that India’s labor laws have had the unintended consequence of discouraging specialisation in labor-intensive stages of the production process in manufacturing industries. Greater integration of domestic industries with global production networks/value chains will accelerate the process of shifting the surplus labor from agriculture to manufacturing. JEL Codes: F10, F15, F4