The tale of twin deficits and lessons for Bangladesh

Since 2006, I have frequently visited Ho Chi Minh City, the financial capital of Vietnam, to offer global market products of American Express Bank, Singapore, to Vietnamese banks. At that time, the financial market of the Socialist Republic was less developed compared to the countries of South Asia. Fast forward to 2023: my wife and I revisited the country and were mesmerised by the pace of growth and modernity in Vietnam.

In contrast, a couple of weeks ago, I had the opportunity to visit Buenos Aires and the stunning Patagonia region of Argentina. It was my first visit to a country where leadership had completely failed. Once a resourceful nation, Argentina is now entangled in a financial mess. This decline began with Juan Perón, the 22nd President of Argentina, whose policies ultimately backfired, plunging the country into severe debt and chronic twin deficits.

In November 2023, Javier Milei of the La Libertad Avanza Party, an economist by profession, was sworn in as the 59th President of Argentina. He devalued the peso by 50%, reduced the size of the government by half, and miraculously brought hyperinflation down, alleviating poverty. 

The swift reduction in public spending helped Argentina swing from a fiscal deficit of two trillion pesos ($120bn; £93bn) in December of the previous year to a surplus of 264.9 billion pesos in April. Argentina also reported a surplus in January, February, and March, marking the first time it had achieved this monthly target since 2012.

However, Argentina's macroeconomic indicators remain challenging, and the country may require further US support. This is considered favourable, as the economist-president is an ally of Donald Trump. 

In this article, I aim to examine Vietnam's success, Argentina's economic woes, Milei's severe and unorthodox macroeconomic policies, and the looming US-China trade war as Trump prepares to assume the presidency in January 2025. 

The moral of the story: lessons to be learned, policies to be implemented from Vietnam and Argentina, and opportunities arising from the US-China tariff war for Bangladesh 2.0.

Vietnam's economic transformation: From challenges to stability

In 2008, Vietnam grappled with a current account deficit of $2 billion, limited forex reserves of $20 billion, and a fiscal deficit of 3%. By 2023, it had reversed its fortunes, achieving a current account surplus of $8 billion, increasing forex reserves to $93 billion, and growing exports fivefold to $392 billion. 

Vietnam's success is attributed to strategic reforms, disciplined policies, and effective integration into global markets.

Key pillars of Vietnam's success

Export-led growth

Vietnam transitioned from an agriculture-based economy to a manufacturing powerhouse. Electronics exports surged from 5–10% of total exports in 2008 to 40–45% by 2023, driven by high-value products such as smartphones and semiconductors.

Argentina's economic struggles: A lesson in mismanagement

Argentina's trajectory over the same period highlights the dangers of inconsistent policies and economic mismanagement. In 2008, Argentina had a current account surplus of $4 billion and forex reserves of $47 billion. 

By 2023, these numbers had reversed drastically, with a current account deficit of $8 billion, depleted reserves of $32 billion, and a debt-to-GDP ratio of 60%.

Key Failures in Argentina's Approach

Policy instability

Frequent changes in economic policies and political uncertainty eroded investor confidence, deterring long-term investment.

Over-reliance on commodities

Dependence on agricultural exports left the economy vulnerable to global price volatility, with limited efforts to diversify.

Inflation and currency crisis

Persistent inflation undermined the peso, forcing Argentina to implement currency controls, further discouraging foreign investment.

Limited FDI

Political uncertainty and corruption stifled foreign direct investment, preventing industrial and technological development.

Bangladesh: Challenges and opportunities amidst global shifts

Between 2008 and 2023, Bangladesh's economy experienced remarkable growth, with GDP surging from $80 billion to $466 billion. However, persistent current account deficits, despite austerity measures, and forex reserves standing at $19.95 billion (as per BPM6) in December 2024 highlight underlying vulnerabilities. 

Additionally, the economy's heavy reliance on textiles, which accounts for over 80% of exports, presents significant challenges for diversification and long-term sustainability.

Key reforms Needed for Bangladesh

Ease of doing business

Streamlining regulations, reducing bureaucratic hurdles, and expediting approvals are essential to improving Bangladesh's global ease-of-doing-business ranking (168 out of 190) and attracting investors.

Policy consistency

Frequent policy changes deter investment and hinder economic stability. Adopting consistent, transparent, and investor-friendly policies is crucial to building long-term confidence among foreign and domestic investors.

Control corruption

Strengthening anti-corruption efforts, governance reforms, and accountability is vital, as Bangladesh currently ranks among the bottom 10 globally in the Corruption Perceptions Index.

Diversify exports

Reducing dependence on textiles by expanding into sectors such as electronics, footwear, pharmaceuticals, and IT services is essential for economic resilience.

Improve FDI climate

Streamlining regulations, curbing corruption, and addressing issues in Special Economic Zones (SEZs) are critical to attracting foreign investment and boosting competitiveness.

Strengthen trade agreements

Emulating Vietnam by engaging in bilateral and multilateral trade agreements can enhance competitiveness and market access.

Enhance fiscal discipline

Improving tax collection and prioritising public spending on infrastructure, education, and healthcare will promote sustainable growth.

Invest in human capital

Focusing on vocational training and skill development will enhance workforce productivity and attract high-tech industries.

Leverage foreign expertise

Employing experienced foreign FDI regulators or specialists to analyse current regulations, reduce bureaucratic delays, and recommend necessary reforms can significantly improve the investment climate.

Impact of US-China trade tensions

In May 2023, the US imposed additional tariffs on $18 billion worth of Chinese goods, targeting strategic sectors like clean energy and semiconductors. These tariffs, though limited in scope, reflect a calculated approach to addressing national security concerns without provoking a full-scale trade war.

Opportunities for Vietnam and Bangladesh

1. Vietnam's Advantage
   Vietnam is well-positioned to benefit from supply chain diversification as companies seek alternatives to China. Its robust trade agreements and established manufacturing ecosystem provide a competitive edge.
2. Potential for Bangladesh
   Bangladesh can capitalize on the rising demand for alternative sources of textiles and other manufactured goods. Improved investment conditions could also attract companies relocating operations from China.

Donald Trump's return: A potential game-changer

Trump's re-election in 2024 could escalate US-China tensions, presenting new challenges and opportunities for Vietnam and Bangladesh.

Impact on Vietnam

1. Increased demand for alternatives
   Rising tensions may encourage more companies to shift operations to Vietnam, bolstering its manufacturing sector.
2. Potential risks
   Prolonged trade disputes could disrupt global trade flows, posing risks to Vietnam's export-driven economy.

Impact on Bangladesh

1. Export growth opportunities
   Bangladesh could expand its textile exports and explore new markets as US-China trade relations worsen.
2. Closer US alignment
   Strengthening ties with the US could enhance trade prospects and attract investment, particularly in emerging sectors.

Vietnam's economic transformation from twin deficits to stability demonstrates the power of strategic reforms, disciplined fiscal management, and integration into global markets. Argentina's struggles, on the other hand, serve as a cautionary tale of the consequences of mismanagement and policy instability.

Bangladesh, at a pivotal juncture, has the opportunity to learn from these contrasting narratives. By adopting Vietnam's strategies, addressing ease of doing business, ensuring policy consistency, and combating corruption, Bangladesh can position itself as a key player in the evolving global economic landscape. Leveraging shifts in US-China trade relations and adapting to potential changes under a Trump administration could unlock new avenues for growth. With bold reforms and strategic planning, Bangladesh can achieve sustainable economic development and resilience in an increasingly interconnected world.