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Economic Growth in South Asia

Despite obstacles such as conflict, corruption and high fiscal deficits, south Asia has achieved impressive economic growth and poverty reduction in the past decade, thanks mainly to economic reforms in the 1990s. If this growth accelerates to 10 per cent a year, the region could see single-digit poverty rates by 2015. A closer look at the evidence suggests that much remains to be done to achieve these accelerated growth rates. First, economic growth in the past decade has resulted in growing income inequality, which may act as a constraint to higher growth. Second, while conflict and high fiscal deficits may not have constrained growth in the past, their persistence may become binding in the future. Third, a comparison with east Asia shows that south Asia's export-orientation, inflows of foreign direct investment, workers' skill levels, infrastructure and ease of doing business are also substantially less advanced than east Asia's.

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Economic Growth in South Asia

Promising, Unequalising, Sustainable?

Despite obstacles such as conflict, corruption and high fiscal deficits, south Asia has achieved impressive economic growth and poverty reduction in the past decade, thanks mainly to economic reforms in the 1990s. If this growth accelerates to 10 per cent a year, the region could see single-digit poverty rates by 2015. A closer look at the evidence suggests that much remains to be done to achieve these accelerated growth rates. First, economic growth in the past decade has resulted in growing income inequality, which may act as a constraint to higher growth. Second, while conflict and high fiscal deficits may not have constrained growth in the past, their persistence may become binding in the future. Third, a comparison with east Asia shows that south Asia’s export-orientation, inflows of foreign direct investment, workers’ skill levels, infrastructure and ease of doing business are also substantially less advanced than east Asia’s.

SHANTAYANAN DEVARAJAN, IJAZ NABI

I South Asia’s Promising Growth

S
outh Asia’s economic growth in the last five years has been impressive. Bangladesh, Bhutan, India, Maldives and Pakistan have all grown at over 5 per cent per year on average, Sri Lanka at 4.7 per cent and Nepal at 2.5 per cent. In 2003-04, shortly before the tsunami hit the region, all countries other than Nepal averaged above 5 per cent GDP growth. India, Maldives and Pakistan performed especially well, averaging GDP growth of nearly 7 per cent.

The economic growth of the last decade has contributed to an impressive reduction in poverty. In Bangladesh, India and Nepal, poverty fell by 9, 10 and 11 percentage points respectively, in Sri Lanka it fell by 6 percentage points. Only in Pakistan did poverty increase by 3 percentage points, but that was because Pakistan experienced economic stagnation throughout the 1990s. In the robust growth of the 1980s, poverty in Pakistan fell by 12 percentage points.

Preliminary estimates based on PSLM 2004-05 survey show a substantial reduction in poverty associated with the recent rapid growth.

Policies, Institutions or Luck?

South Asia’s growth is all the more impressive because the subcontinent suffers from many growth-retarding factors

– such as corruption, conflict, high fiscal deficits and dependence on an enclave natural resource – that have afflicted African countries, which have grown much more slowly [Devarajan 2005]. Bangladesh is considered by Transparency International to be the most corrupt country in the world, and yet its GDP continues to grow at 5 per cent a year, with per-capita income rising at 3 per cent a year. Sri Lanka and Nepal have suffered severe civil conflict, but registered per-capita consumption growth rates of 3 and 4 per cent a year, respectively. Sri Lanka and India have run fiscal deficits of over 9 per cent of GDP for decades. And Maldives has successfully developed an enclave-type tourism industry (leasing out islands to tour operators, who employ foreign labour and use imported materials), with GDP growth averaging 9 per cent a year over the last two decades, and per capita GDP tripling to $2,300.

Of course, much of south Asia’s recent growth is due to the significant and sustained policy reforms that governments undertook in the last two decades [Ahmed undated]. Sri Lanka began liberalising its trade and industrial policies in the 1980s, India and Bangladesh in the early 1990s, and Nepal and Pakistan in the late 1990s. In the financial sector, India and Sri Lanka started deregulating interest rates and allowing private banking in the 1990s, followed by Pakistan and more recently by Bangladesh. Throughout, with some exceptions, south Asian countries maintained prudent fiscal and monetary policies. For much of the time, inflation in every south Asian country was below the world or developing country average.

But it is also clear that institutions in south Asia have helped make the payoffs to policy reforms higher than expected, given the presence of seemingly binding constraints, such as corruption and conflict. For instance, the (mostly) democratic institutions and relatively free press in south Asia has meant that the process of policy reform, while painfully slow, results in reforms that represent a domestic consensus, and are therefore sustained.

In addition, external financing has played a complementary role to policy reforms in south Asia. Pakistan’s recent economic turnaround illustrates how loosening the credit constraint in a reforming economy unleashes rapid growth. Macroeconomic difficulties associated with the need to service a large and growing national debt, and steady decline in remittances and concessionary capital flows, halved the growth rate in the 1990s (it was 6 per cent in the 1980s). All this changed after September 11, 2001. Pakistan’s debt burden was reduced sharply, concessionary capital resumed, and remittances surged. This, combined with far-reaching reform of the banking and energy sectors, privatisation of state-ownedenterprises and improved public finances, has put Pakistan back on its trend growth path, even surpassing it in recent years.

Economic and Political Weekly August 19, 2006

Another source of external finance is the substantial and rising inflow of capital by non-resident nationals in the form of remittances (repatriation of savings) that increases the pool of capital and stimulates demand to spur economic growth. Remittances by south Asian nationals working abroad totalled $22 billion in 2004-05, and account for the region’s stability in balance of payments. By comparison, remittance earnings in sub-Saharan Africa totalled $6 billion. Remittances are a far more important source of external financing in south Asia than in east Asia, where external financing is primarily in the form of foreign direct investment.

Finally, relatively favourable external conditions contributed to south Asia’s strong economic performance. In the past few years, good weather conditions have contributed to high agricultural output, still an important component of GDP in most countries. Low world interest rates have also helped some countries borrow in international markets. At the same time, south Asia suffered several adverse shocks, including three natural disasters in the last two years (floods in Bangladesh, tsunami in India, Maldives and Sri Lanka, earthquake in Pakistan), as well as sharp increases in world oil prices. That the region turned in an impressive growth record in 2005 in the wake of these negative shocks speaks to the strength of its policies, the robustness of some of the institutions, and the resilience of its people.

Accelerating Economic Growth

The impressive economic performance of the last decade, but especially the last three years, has encouraged south Asian policy-makers and analysts to aspire to the east Asian growth rates of 7 to 10 per cent, and sustain these over the coming decade. As we shall see later in the paper, a lot remains to be done to strengthen policies and institutions to sustain such high growth rates. But if the required changes are made and the higher growth rates are sustained for a decade, south Asia will see a substantial reduction in poverty1 (Figure 1), from the current range of 23 per cent (India, Sri Lanka) to 50 per cent (Bangladesh) to a much lower range of 4 to 13 per cent. Poverty in Pakistan is likely to fall dramatically from the current 35.2 per cent to 12.4 per cent because of its high elasticity of poverty reduction with respect to income.

II Challenges to Sustaining andAccelerating Growth

Rising Regional Inequality

Despite recent growth and poverty reduction, south Asia still has nearly 400 million poor people (out of a population of 1.37 billion). Poverty is not just endemic, but increasingly concentrated in particular, lagging regions. Not only are these regions poorer, but their growth rates are substantially slower than the better-off regions.

The phrase “two Indias” exemplifies this difference in regional development outcomes (Figure 2). In 2002-03, all-India per capita GDP was $480; the poorest seven states (accounting for 55 per cent of the population) had a per capita GDP that was two-thirds the national average, while in the richest seven states (33 per cent of the population) per capita GDP was nearly

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Figure 1: Implications of Growth for Poverty: Reduction in South Asia galloping ahead of the poorest but populous northern states with growth rates of

Poverty

4

incidence in only 2 per cent. This threatens to further

10

Sri Lanka

23 2013 with 10 increase the poverty gap in the two re

per cent GDP

gions; currently, head count poverty in the

8

13 growth rate

poorest northern states and the better-off

Pakistan

35

Poverty

(in per cent)

southern states is 35 per cent and 18 per

incidence in

9

15 2013 with 7 cent, respectively.

Nepal

31 per cent GDP

tRegional variations in income and

growth rate

poverty outcomes are not peculiar to a

large country like India. Sri Lanka, a much

13

Most recent

15

a

India

poverty

23

estimate
Bangladesh 13 20 (percentage) 50
0 10 20 30 40 50 60
(in per cent)

Note:Most recent poverty estimates are those estimated by the World Bank. The method used for computing growth elasticity varies among countries. Bangladesh: Wodon (2001); India: Deaton and Dreze (2002); Nepal: Datt and Ravallion (1992); Pakistan: Bourguignon (2003); Sri Lanka: Bourguignon (2003).

Figure 2: The Two Indias

16,000

6

smaller economy, shows a disturbing regional disparity in income and poverty. The Western Province, led by Colombo, has 30 per cent of the country’s population but accounts for 47 per cent of national GDP, and poverty in the Western Province, at 11 per cent, is less than half the national poverty rate of 23 per cent. Furthermore, most of Sri Lanka’s growth in the past decade was concentrated in this one province: the Western Province’s share of

Rs 8,183 Rs 15,843 Rs 5,838 Rs 13,100 3 4 2 5 7 States above national average Weighted average of Bihar and UP Weighted average of TN, Karnataka, AP Per capita GDP 2002/03 (left scale) Per capita GDP growth rate (right scale) 7 States below national average

GDP rose from 40 to 47 per cent in 10 years. Even within subregions, there is significant inequality. In Pakistan’s Punjab

province, central and northern districts are

much better off than the southern districts

(Figure 3). With higher educations stan

12,000

8,000

4,000

4

2

(in per cent)

dards and better infrastructure, the better

off districts attract more investment and

-0

and Kerala

Figure 3: Intra-Regional Differences in Economic Outcomes: Pakistan Punjab

120 45 40

40

100 35

therefore grow more rapidly than the southern districts.

South Asia’s high and growing inequality may itself act as a brake on future growth and poverty reduction. First, the higher the inequality in a country, the harder it is for growth to reduce poverty. This is why Sri Lanka, which has the highest Gini coefficient in south Asia [World Bank 2005], had such anaemic poverty reduction despite nearly 5 per cent

108
25 could reflect distortions in the economy as 20 well as unequal power relations, both of

92 30 32
60

30

average annual growth. Second, inequality

which dampen growth. Highly unequal

40

20

0

15 levels of education in Pakistan, for in10 stance, means that some talented children – many of whom are likely to be girls –

5 are denied the opportunity to develop their

0 human capital, which is the main determi-

Northern districts Central districts Southern districts nant of long-run growth. Inequality is often the reflection of capture of the political

Gross primary school enrolment (left scale)

system by certain ethnic groups or castes,

Poverty incidence (right scale)

who then perpetuate the system by provid

double that of the poorest seven states. In Karnataka, Kerala and Tamil Nadu (21 per ing private benefits to their own group,
the two largest and poorest northern states cent of the total population), at an average, rather than public goods which generate
(Bihar and Uttar Pradesh, 25 per cent of enjoyed more than twice the GDP per economic growth. Many of India’s lagging
total population) per capita GDP was less capita of the quarter of the population con states, such as Bihar, fit this description.
than half the national average and only a centrated in the two poorest northern states. Third, rising inequality in the wake of
third of the richest seven states. The four Furthermore, with average GDP growth market-oriented pro-growth policies could
southern states, Andhra Pradesh, rates of 5 per cent, the southern states are elicit a backlash against these policies,
Economic and Political Weekly August 19, 2006 3575
Figure 4: Manufacturing Value Added in Selected South and East Asian Economies high fiscal deficits in India and Sri Lanka.

(in 1995 US$b)

While these constraints may not have been binding in the past, they may become so

in the future, as south Asia attempts to accelerate its growth rate to eliminate

10.38 1.32 3.20 1.58 11.93 6.15 5.33 38.01 212.29 73.66 54.78 35.13 6x 7x 17x 27x 6x 40x South Korea Turkey India Pakistan Thailand Malaysia 1968 2001 Factor increase

Source:Sanjaya Lall.

poverty in the coming decades. For instance, the conflict in Sri Lanka has been estimated as reducing the country’s growth

rate by 2-3 percentage points – just the gap needed to get to east Asian growth rates. Although Nepal has reduced poverty by

11 percentage points in eight years, its growth has slowed considerably in the last few years, as the Maoist rebellion and

other governance problems intensified. Similarly, Bangladesh may have been able to grow at 6 per cent a year and

achieve universal primary and (nearly)

secondary enrolment with widespread perceptions of corruption, but it faces major hurdles, such as infrastructure bottlenecks

Source: World Development Indicators, various years.

Figure 5: Merchandise Exports in South and East Asia

(As per cent of GDP)

120 100 80 60 40 20 0

Malaysia

Thailand

Korea

Pakistan BangladeshIndia

and the need to diversify its exports, as it seeks to become a middle-income country. Modern infrastructure cannot be built without foreign direct investment, yet Bangladesh’s ratio of gross FDI to GDP is 137th out of 141 countries. According to the World Economic Forum’s Global Competitiveness Index, Bangladesh ranks 98th out of 102 countries in growth competitiveness and 91st out of 101 countries in business competitiveness.

Finally, India introduced an ambitious

Source: World Development Indicators, various years.

programme to reduce its fiscal deficit – and

Figure 6: Technology Intensity in Manufactured Exports then missed the plan targets in the first two years. While the deficit has been reduced Technology intensity in manufactured exports (percentage) in the past year thanks to higher revenues,

80 70 60 50 40 30 20 10 0

Medi Te h l Pakistan India China Malaysia Thailand Resource Based Low Technology Medium Technology High Technology 1981 2000 1981 2000 1981 2000 1981 2000

there are limits to how much more deficit

reduction can be squeesed out of this instrument. Expenditure reduction remains politically very difficult in India. South Asia’s other high-deficit country, Sri Lanka, is facing a fiscal deficit of 9 per cent of GDP this year which, in the absence of concessional lending, will have to be financed by expensive commercial borrowing, increasing the country’s debt burden further.

Achieving East Asian Growth Rates

As we said earlier, if south Asia can achieve and sustain east Asian growth rates of 7-10 per cent a year, the subcontinent

sometimes leading to distortionary policies that slow growth. Recent electoral outcomes in India and Sri Lanka exemplify this. Finally, if inequality between regions rises above a certain threshold, it can trigger a violent conflict which, in turn, can lead to decades of reduced growth.

Overcoming‘Binding Constraints’

As stated earlier, south Asia achieved relatively high growth in the past decade despite numerous obstacles, such as conflict in Sri Lanka and Nepal, corruption in Bangladesh and many Indian states, and will see a substantial reduction, and perhaps elimination, of poverty. Does south Asia have the ingredients for rapid growth that east Asia had? We find numerous gaps between the two Asias. Manufacturing: Expansion of manufacturing is critical because of its beneficial Costs of doing business: The business community faces several transactions costs, not directly related to the production cycle, but are, nonetheless, significant. These include costs associated with doing business such as the time it takes to start a business, register property, wind up the business file for insolvency and enforce contracts. Figure 12 shows that these costs are substantially higher in south Asia compared to east Asia. Savings and investment rates: Finally, India, Pakistan and Bangladesh had much lower investment-to-GDP ratios as of east Asian standards in the supply of skilled workers. Two proxies to capture workers’ skills are gross enrolment at the secondary level and average years of schooling of workers. Both of these education attributes give information about the trainability of workers. Acquiring industryspecific skills to attract FDI is facilitated by a trainable workforce. On these measures, east Asian economies fair far better than the economies in south Asia (Figure 7). Infrastructure: The quality of infrastructure is a key determinant of investment, especially FDI. Figures 8 and 9 show that on two important types of infrastructure, consumption of electric power, and telephone mainlines, east Asian economies are significantly ahead of south Asian economies.

creasingly, their exports consist of products 300

209

embodying high technology. In India and

182

200 -

Pakistan, on the other hand, high techno

105

logy intensity products are a small share

46 49

100

27

5

16

of total exports.

Skilled workers: South Asia also falls short 0 feature of the leading east Asian econo

500

mies such as China, Malaysia and Thailand is the speed with which they have

400

moved up the technological frontier. Inis related to the technology intensity of manufacturing (Figure 6). A significant 600

538

Figure 9: Telephone Mainlines Per 1000 People, 2003

impact on employment; both in terms of generating more jobs but also higher wages for workers due to rapid productivity increases. Although manufacturing value added in south Asia has registered healthy growth in recent years, it needs to grow much faster to catch up with east Asia (Figure 4). Between 1968 and 2001, manufacturing value added increased by a factor of 40, 27 and 17 in South Korea, Malaysia and Thailand compared to a factor of 6 and 7 in India and Pakistan respectively. Consequently, the share of manufacturing value added in GDP increased 400 per cent in Malaysia, 300 per cent in Thailand and over 200 per cent in Korea compared to an increase of only 20 and 30 per cent in India and Pakistan. Export orientation: Export-led growth fosters sustained GDP and total factor productivity growth over long periods of time because it promotes competitiveness and efficient use of resources. South Asia’s export performance, although improving, is still far below the successful east Asian economies. The ratio of exports to GDP in Malaysia, Thailand and Korea is considerably higher than in Pakistan, Bangladesh and India (Figure 5). Technology intensity: Export performance

Figure 7: Trainability Attributes of Workers in South and East Asia

Gross enrolment

90 at secondary level 85

s

(percentage 2000)7680

2

70

70

Average years of60

A

schooling of48

45 sadults (2000) 50

40 40 30 20 6.5

6.4

6.9

10 5.1

3.9

2.6

0 Thailand China India Bangladesh Sri Lanka Pakistan

Figure 8: Electric Power Consumption Per Capita kWh, 2002

7000

61716000 5000 4000 3000

2832 2000 1626

987

1000

380 363

297

64

100

0 -

ChinaChinaSouth KoreaSouth Korea

ThailandThailand

Malaysia

Malaysia

compared to east Asia. In 1993-2002, China grew at 8.9 per cent per annum with an associated average savings and investment rates of 39.8 per cent and 42.3 per cent respectively. In the same period, Korea’s income per capita increased 55 per cent with savings and investment rates of 32.3 and 34.4 per cent respectively. These were substantially higher savings and investment rates than those of south Asian economies in the same period (Figure 11).

It could be argued that east Asia’s high investment rates, with only moderately higher growth rates than south Asia’s,

IndiaIndiaPakistanPakistan

BangladeshSri Lanka

Bangladesh

Sri LankaNepal Nepal

Economic and Political Weekly August 19, 2006 means that east Asia is investing inefficiently. Indeed, the east Asian financial crisis in the late 1990s uncovered a large number of investment projects that were riddled with inefficiencies and waste. Is there a lesson for south Asia in this experience? Has south Asia been investing more efficiently than east Asia? Alas, the evidence does not support this. Figure 12 shows that compared to east Asia, both total factor productivity as well as capital accumulation has been lower in south Asia.

III Policy Choices

In light of these challenges, the policy agenda facing south Asian countries, as they aspire to attaining 10 per cent annual growth, seems enormous. Most of these policies are specific to the individual country’s circumstances. Nevertheless, just as south Asian countries are jointly experiencing rapid growth, they share some common themes for accelerating and sustaining this growth. In this section, we highlight the high priority policy choices facing two or more south Asian countries.

These choices are organised around those aimed at increasing productivity and attracting investment; improving the quality of labour; reducing inequality; and exploiting cross-border synergies.

Increasing Productivityand Attracting Investment

Resolving civil conflict: Civil conflict, especially in Nepal and Sri Lanka, closes off large areas to gainful economic activity. The long, drawn-out conflicts are a drain on the already thin administrative capacity and they erode governments’ ability to build a constituency for reform. Furthermore, conflict diverts valuable financial resources from public investments that attract private investment and promote growth to military expenditures. Resolution of civil conflicts therefore will have substantial pay-off in terms of unlocking development potential.

Ensuring and sustaining macroeconomic stability: Macroeconomic uncertainty clouds the investment horizon, and lack of fiscal space lowers public expenditures that attract private investment (infrastructure) and upgrade the quality of workers.

Sri Lanka and India both have large national debts (105 and 85 per cent of GDP, respectively) driven by unsustainable fiscal deficits (8 and 9.5 per cent respectively). In Sri Lanka, resolution of the civil conflict will help lower the deficit but the more chronic problems are the entitlements associated with the popular perception that Sri Lanka is a “welfare state” that must provide both jobs as well as economic and social services. In India, debt servicing increasingly shrinks the fiscal space for critical expenditures and it is only a matter of time before interest rates begin to rise steeply. Pakistan has pursued fiscal restraint after a decade of profligacy, but the rapid expansion of credit has led to an inflationary impetus which needs to be checked. Upgrading infrastructure: The quality of infrastructure is critical for competitivenessand productivity growth. Bangladesh’s main port, Chittagong, is among the most inefficient and costly in the region. The generation capacity in the power sector (not increased for many years) has to be increased by addressing governancerelated problems (corruption in tendering, etc). Nepal must improve trade logistics

ANU College of Asia and the Pacific Research School of Pacific and Asian Studies Director’s Section

Research Fellow Academic Level B

Fixed Term – 3 years

Salary Range: A$66,764 - A$78,772 (from 16 November 2006) pa plus 17% super

Reference: PA3559

The Research School of Pacific and Asian Studies seeks a scholar of modern South Asia to work with the Director, Professor Robin Jeffrey, in extending study of South Asia at the ANU. The successful applicant will preferably have a PhD and be expected to undertake research and publish at a high standard. Applicants will also be expected to take initiative in running conferences, undertake administrative duties and become an outstanding teacher at all tertiary levels. Applicants are welcome from any field in the social sciences, though those in modern history or politics are likely to be preferred. It is expected that the successful applicant would probably commence duties in December 2006.

Selection Criteria: http://info.anu.edu.au/hr/jobs/ or from Gabrielle Cameron, T: 02 6125 4444,

E: Gabrielle.Cameron@anu.edu.au

Enquiries: Robin Jeffrey, T: 02 6125 2221, E: Robin.Jeffrey@anu.edu.au

Closing Date: Friday 6 October 2006

Figure 10: Comparison of Indicators of Business Environment in South and East Asia

160 140 120 100 80 60 40 20 0

Figure 12: Sources of Growth in South and East Asia, 1960-2003

3.5 3 2.5 2 1.5 1 0.5 0 India Pakistan Capital growth
Labour growth
Total factor productivity

with India to take advantage of the growth impetus of a large neighbour. In India, poor quality infrastructure did not impede the export of internet-enabled services, but the competitiveness of trade in goods is affected by inefficiencies and bottlenecks in the road/railways network and ports. Equally important are city services that affect livability and thus influence location decisions. In Pakistan, the northsouth corridor will be central to increasing

500 450

Starting a business (Days 400

required) 350 300 Registering property (Days required)

250

200 Closing a business (Months to

150

resolve insolvency)100

50 Enforcing contracts (Days

0

needed)

ChinaSouth KoreaThailandMalaysiaIndiaPakistanBangladeshSri LankaNepal

Figure 11: GDP Growth, Saving and Investment in South and East Asia, 1993-2002

21.1 22.9 24.2 17.3 24.8 39.8 32.3 32.2 30.4 21.3 22.2 20.6 16.3 24.6 36.9 33 32.1 30 5 6.2 4.4 3.5 4.4 8.9 5.3 5.2 2.7 0 5 10 15 20 25 30 35 40 45 0 1 2 3 4 5 6 7 8 9 10

Bangladesh India Nepal Pakistan Sri Lanka China S Korea Malaysia Thailand

'

  • Average Annual Gross Savings/GDP (left scale)
  • Average Annual Gross fixed capital formation/GDP (l
  • Average Annual GDP Growth rate (right scale)
  • eft scale)

    Bangladesh East Asia

    up-country competitiveness. Sri Lanka’s road and rail network is in urgent need of modernisation. Diversification: India’s economy and its exports are beginning to diversify and create new growth vents. The other two large regional economies, Bangladesh, Pakistan also need to look beyond the cotton value chain. In Bangladesh, the considerable export potential in frozen food, pharmaceutical and ceramics needs to be exploited. Construction activity and new crop varieties (now that high-yielding rice varieties have run their course) will provide the next phase of productivity growth. Substantial growth impetus will also come from developing new urban clusters for economic activity to overcome the growth

    – retarding congestion of Dhaka. In Pakistan, the canal colonies at the turn of the last century, import-substituting industrialisation in the 1960s, green revolution farm technology in the 1960s and the 1970s have run their course. Potential new growth vents are the Makran coast between Karachi and Gawadar, the opening up of the eastern border for trade with India and product diversification, and the goods and energy trade with central Asia.

    Improving the Quality of Labour

    Deepening human capital: Low productivity growth in south Asia (compared to east Asia) can be attributed, among other factors, to the region’s poor showing on worker trainability attributes (literacy, years of education) that discourage investment-led growth. The ongoing programme of increasing gender-neutral enrolment in and completion of primary schooling is a welcome development. This needs to be complemented with a doubling of the transition to secondary education and tailoring east Asia’s public-private partnerships in firm-specific training programmes to local conditions. Nurturing remittances: South Asia with its young population is reaping rewards of an increasingly integrated global labour market in the form of large remittances. Non-resident nationals have helped build up international reserves and give fillip to aggregate demand. In Nepal and Sri Lanka, they have helped bridge the regional income divide. South Asian workers overseas will remain an important source of income and economic growth for their respective parent countries. The human development programmes must be mindful of this and must seek to strengthen the employability of south Asian workers in better paying jobs abroad.

    Reducing Inequality

    Lagging regions: In India and elsewhere, growing income inequality will strengthen populist politicians and risk diverting the focus from pro-growth policies. The political leadership in lagging states will have to be engaged to address investors’

    Economic and Political Weekly August 19, 2006 reluctance to locate in those states. In Pakistan, agricultural productivity in lagging regions within provinces has to be increased and NWFP and Baluchistan governments’ focus shifted to the growth agenda. In Sri Lanka, the growth potential of regions outside of Colombo and the Western Province has to be realised. Connectivity of Nepal’s western region and in parts of the eastern region to domestic and international markets has to be improved via reliable and cheap road, telephone and electric power nodes. Service delivery: Improved delivery of public services (health, education, water, sanitation) will help moderate the impact of personal and regional inequality on growth and will contribute to the sustainability of economic growth. Budget reform to give priority to cost effective public service delivery is ongoing throughout the region and needs to be completed. In Nepal, the legacy of social stratification by gender, caste and ethnicity in the allocation of public resources has to be redressed by making local institutions and the civil service more accountable for delivering socially inclusive outcomes. In Pakistan the gender gap in literacy has to be bridged and also the rural-urban divide. In India, state and central government sponsored services have to expand coverage, improve quality and be made more cost effective.

    Achieving Cross-Border Synergies

    Finally, south Asia remains the least integrated region in the world. Starting from such a low base, greater integration can generate enormous benefits along several dimensions. Reducing cross-border conflict: Crossborder conflicts, since independence, have eroded the old trade and investment patterns and mobility of people across borders. Both India and Pakistan incur large military expenditures at the expense of much needed social development. It is essential to manage conflicts in a way that social investments are protected and intraregional trade, investment and people’s mobility is restored to levels enjoyed by other regional groupings. Regional trade: Intra-SAARC trade (at 6 per cent of the area’s worldwide exports) is woefully low compared to trade in other regional blocks (23 per cent in ASEAN, 56 per cent NAFTA, 61 per cent EU, 12 per cent MERCOSUR). This means that the cost efficiencies due to proximity are not being exploited. In part, this is the result of cross-border conflicts (India-Pakistan), but also reflects poor intra-regional trade logistics. There are several fresh initiatives now towards “free trading agreements” between several south Asian countries. These are welcome as long as they restore the advantage of geography and facilitate global trade liberalisation. The tendency to move to administered “free” trade agreements and the excessive focus on bilateral trade deficits need to be watched for their adverse impact on trade and competitiveness of the member countries. Connectivity: Connectivity in general in the region is poor. Bangkok and Dubai, the two international airline hubs on either side of the region are better connected to capitals within the region than is any regional capital. This adds several hours of additional flying time and substantial cost to mobility within the region. Intraregional telephone connections are also of poorer quality compared to each country’s global telecom access. Road/rail connections are sub-standard. Combined with visa restrictions and inadequate intra-regional banking services, we have a discouraging climate for intra-regional business activity. Water: Nothing underscores more the need to promote pan-regional thinking than water. India and Pakistan on the west and India and Bangladesh on the east share common river systems. Agriculture in all three countries depends crucially on irrigation systems commanded by common rivers. Satisfactory water-sharing arrangements thus are critical in ensuring economic growth both via rising farm productivity and also by reducing the threat of conflict. Energy: South Asia is characterised by one of the energy-thirstiest nations (India) sitting next to three energy surplus nations (Nepal, Bangladesh, Bhutan). Yet with the exception of Bhutan, energy trade between India and its neighbours is extremely small. Bridging the gap between energy supply and demand through regional cooperation could be one of the biggest wins in south Asia’s quest for growth.

    To conclude, the recent improvement in growth outcomes in south Asia are encouraging and constitute a solid platform to build a programme of sustained economic growth and poverty reduction in the coming decade. It is critical, however, that adequate investments are available and growth is broad-based and inclusive. This will require addressing a number of strategic and policy challenges specific to south Asian economies as well as cross-border hurdles in the region. While the challenges are enormous, the dynamism and openness that characterise south Asia today make us optimistic that they will be met, and the region will be substantially free of poverty in a decade.

    [��

    Email: sdevarajan@worldbank.org

    Note

    1 The poverty reduction estimates are based on several assumptions about the relationship between income and consumption growth and the poverty reduction responsiveness (elasticity) of the economy to income growth. The estimates are thus indicative.

    References

    Ahmed, Sadiq (2005): ‘Explaining South Asia’s Performance: A Puzzle or Good Policies?’, unpublished.

    Bourguignon, F (2003): ‘The Growth Elasticity of Poverty Reduction: Explaining Heterogeneity across Countries and Time Periods’ in T Eicher and S Turnovsky (eds), Inequality and Growth Theory and Policy Implications, MIT Press, Cambridge.

    Datt, G and M Ravallion (1992): ‘Growth and Redistribution Components of Changes in Poverty Measures: A Decomposition with Applications to Brazil and India in the 1980s’, Journal of Development Economics, 38, pp 285-95.

    Deaton, A and J Drèze (2002): ‘Poverty and Inequality in India: A Re-Examination’, Economic and Political Weekly, September 7, pp 3729-48.

    Devarajan, Shantayanan (2005): ‘South Asian Surprises’, Economic and Political Weekly, Vol XL, No 37, September.

    Wodon, Quentin (2001): ‘Growth, Poverty and Inequality in Bangladesh’, Background paper No 2 for the Bangladesh Poverty Assessment.

    World Bank (2005): 2005 World Development Indicators, World Bank, Washington DC.

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