Economic Development in South Asia and the Impact of Globalization
- ISHRAT HUSAIN
I would like to answer a couple of main questions by using thought paper as a way to convey my examination regarding the market of South Asia. The first question is: How hold the economies in South Asia been and what are their forecasts for future years? And the second question is: How can these countries face up to the challenges to globalization and what should they be doing to maximize the advantages of globalization?
Economic situation and prospects
In the ten years of 1990s, South Asia has grown at 5. 6 percent, faster than for low- income countries but slower than the East Parts of asia. The wide ranging reforms which have been implemented in this region during the last ten years roughly have brought about some important changes in the monetary landscaping and removed some of the major constraints that were retarding the improvement of the region. I want to recapitulate them briefly.
First, there is now a broad politics consensus about the thrust and course of economic guidelines in almost all the countries. The beat of BJP Government in the recent Indian elections should not be construed as an indictment of reforms but a manifestation of the growing impatience of the electorate that these reforms never have been deep, satisfaction and fast enough to touch the lives of the majority of the population. This politics consensus has survived many changes of the governments in India since 1991 and the alternating move of ability in Pakistan, Bangladesh and Sri Lanka.
Second, reliance on private sector as the main investor, maker and distributor of goods and services has replaced the old idea of the commanding levels model of the economy in which State andState-ownedenterprises were the primary tools of professional development. The demise of Licence Raj has given go up to a wholesome competitive environment where market mechanism is utilized for allocation of resources. This switch has improved the entire efficiency of tool allocation and usage in South Asia.
Third, unilateral trade liberalization has been quite speedy in the 1990s in the whole region. Average tariff rates have dropped from90-100percent in 1980s to13-32percent today. Sri Lanka leads just how accompanied by Pakistan. India and Bangladesh
1Keynote address delivered on the occasion of the center East and South Asia Seminar of KPMG placed at Bahrain in July 11, 2004
are considered laggards in trade liberalization corresponding to a global Bank study, but are in far better form than what these were in the 1970s and 1980s. Export promotion has finally been accepted as the new gospel in contrast to the past five decades of obsession with inward looking import substitution and security of home industry.
Fourth, domestic financial and capital market reforms have made the financial sector audio and healthy. In Sri Lanka and Pakistan the strides made are quite advanced. India is little by little and gradually checking to overseas competition and adding new legislation to improve the performance of the banks and upgrade the quality of investments. Bangladesh has started the process recently but is committed to progress in the same direction.
Fifth, macroeconomic stability i. e. , low inflation, low local interest rates, and steady but natural exchange rates, has become the hall- mark of these economies. Exchange rate regimes in all the countries have turned from set to managed float. I-directionalmovement i. e. both, depreciation or gratitude of domestic currency takes place relating to market source and demand conditions. There is absolutely no longer a hang up to defend a specific level of exchange rate and preserving competitiveness of exports and smoothing volatility are the main policy factors. Large forex reserves are turning up in every the countries with India's coverage more than 15 a few months imports accompanied by Pakistan about a year and Bangladesh 4 a few months.
Sixth, fiscal consolidation and discipline will be the furthest in Pakistan with fiscal deficit down to 4 percent of GDP in comparison to average 7 percent and local learning resource mobilization stepped up within the last five years by almost 70 percent. India's recent budget released on Thursday aims at 4. 4 percent of GDP for the Central Authorities however the consolidated deficit continues to be uncomfortably high. Tax-GDPratios are low in comparison abroad at the similar income levels. Therefore domestic savings and investment ratios have never matched up those of China and other fast growing East Asian countries.
Seventh, India has obviously taken benefit of the low income, British speaking, highly informed technical manpower to become leader one of the recipients of outsourcing than it related services. Precisely the same trend is beginning to emerge in other services such as medicine clinical trials, health Care, biotechnology, research and development. But the immediate job impact of the exports of these service is likely to be limited, in the medium and permanent the enlargement of burgeoning middle income and the demonstration effect on the younger generation to acquire higher medical and specialized education will help India in the transformation of its current economic climate. Other countries in South Asia are latecomers to the field and also have a whole lot of catching up to do.
These improvements in macroeconomic fundamentals have resulted in up gradation of credit history of India and recently Pakistan. Both countries established usage of international relationship market at fine charges.
Despite these positive accomplishments and strides manufactured in these countries there are a few very difficult obstacles to surmount.
First, politics and geopolitical risks in your community are still quite enhanced. The long status hostility between India and Pakistan, the acquisition of nuclear and missile capabilities by the two countries and the consequential sanctions imposed after them, the lively frontline position of Pakistan in the war against terrorism, the prolonged civil battle between Tamil Tigers and the government in Sri Lanka, and the consistent hits called by the opposition people against the government in electric power in Bangladesh have added dangers to conducting business and locating investment in these countries.
Second, bureaucratic headaches, long drawn steps, un-evenapplication of rules and regulations, excessive discretionary power in the hands of lower level bureaucracy, shortages of essential infrastructure facilities and low productivity of labour make also have made the region not this attractive place for international investors.
Consequently, Foreign Direct Investment (FDI) has not yet made any significant effect on the economies of the spot. FDI makes up about 0. 5% of GDP with India receiving$3-4billion on a yearly basis and Pakistan about $1 billion. Portfolio investment to India had taken an upwards trend but endured a set back in the aftermath of the recent elections.
Third, there's a very littleintra-regionaltrade occurring in South Asia. Intra- regional trade has continued to be stagnant at less than 2% of the full total trade within the last 25 years. Regional trading preparations have made an enormous difference in THE UNITED STATES, Europe and East Asia, nonetheless they have been unsuccessful in South Asia. The recent try to revitalize SAARC is in the right course and will energize trade and growth but and then the extent which it unleashes competition that reduces domestic prices, permits achieving economies of scale and acquiring new technology.
A World Loan company study has predicted that if normal relationships had prevailed in 2001 and trade was at global averages, theIndo-Paktrade could have been $1. 85 billion rather than the actual trade of only $254 million. Other estimations show that the quantity of bilateral trade can surpass $4 billion.
On the foundation of the aforementioned developments, plan and structural changes that contain taken place over the last ten years or more it would be safe to surmise that the probability of South Asia to realize average annual progress rate of 6 to 7 percent is at the realm of possibility. But as I point out in the later part of my remarks there are a variety of additional measures that require to be taken as this progress rate can neither be automatically achieved nor it can be taken for granted.
Meeting Challenges of Globalization
Empirical evidence clearly signifies that globalization, technical improvement and competition are the primary drivers of growth and wealth in the 21stcentury world. How well South Asian countries have located themselves in reaching this task is the question I would like to use now.
Economic fundamentals have better to a very large extent in all the South Parts of asia within the last decade or so. Broad politics consensus on the content and route of economic regulations will provide some reassurance that the countries will be able to traverse this route carefully and agility. I would therefore concentrate my attention on things that need to be done to maximize the benefits from globalization.
First and most important is investment in education and real human development. The latest census data for 2001 demonstrates India's literacy rate has truly gone up to 64 percent but it also demonstrates that at least one third of its populace and labour pressure is not fully equipped to take up the ever changing and more technical responsibilities of the current economic climate looking to outclass other contending countries. Pakistan and Bangladesh have almost half their populace illiterate and Sri Lanka is the only country in the region with almost one hundred percent literacy.
But his full literacy level boosts another stark fact inside our face i. e. , the growing imbalance between the demand for skills enforced by market economic makes and the way to obtain skills produced by our educational institutions. There is a surfeit of highly informed graduates who aren't employable and there's a shortage of personnel who can perform routine technical jobs in production and service. India produces good quality Research and Executive graduates annually who can focus on the high end of the job market but lack of attention tonon-Universitytechnical education and its
quality have created huge gaps at the middle end of the job market. This situation is a lot aggravated in Pakistan and Bangladesh where the issues of quality, relevance and numbers are intertwined. Sri Lanka does not have any problem with the quantities but high level of unemployment among University graduates testifies to the mismatch in the abilities. The widespread aggravation one of the parents and graduates similarly and a higher level of dissatisfaction on the list of employers in finding the right people for the right careers are further proof the imbalance in labour market.
This imbalance and insufficient employability has serious repercussions for the composition and expansion of the basket of goods that can be exported. Essentially the most dynamic and immediate growing areas of exports on earth market today and in the medium term are those associated with high technology and to some extent medium technology. While India is making some headway in increasing its penetration of high technology exports the record of other countries in the region is not so promising. They remain stuck in the low technology exports particularly textiles and clothing which have a declining stocks on earth trade. Thus the necessity to beat the skill obsolescence and convert towards medium and high technology exports was not as visible as it is today.
One particular means by which this change in the structure of exports can be accelerated is by detatching the obstacles and constraints in the way of foreign investors and Multinational Corporations (MNCs). FDI is an important drive for integration for this as MNCs have set up source chains and designed production systems that tend to locate each stage of development in the united states with the cheapest cost. Affiliates of your MNC in a single country often export to some other for eventual sales in another country market. These affiliates act as theon-the-jobtraining grounds for the acquisition and dissemination of the abilities needed for creation and minimizing costs. These skills are then disseminated multiplied throughout other firms in the united states.
South Parts of asia have up to now missed the boat by not becoming a part of global value string and taking part in international supplier chain arrangements. There is absolutely no single business model for taking part in this chain and there may be many stages of changeover and many modes of involvement. For example, joint endeavors, franchising, purchasing by international organizations, licensing, sub-contracting, fully owned firm, original equipment, processing, original design and creation, proper partnerships for technology, international acquisition of equity are the diverse means whereby expanding country companies can gain large access to international markets at their own level of functionality, climb the technology ladder and benefit from globalization. East Asia is a major participant in this global supply string and produces parts and components for a number of manufactures. It is time that Southern Asian countries do make an effort to get involved in this value string.
a) Trade facilitation through expeditious border crossings, quick custom clearance, successful port facilities, improved upon transport links should precede or take and happen simultaneously with the enlargement of volume of cross boundary trade.
b)Domestic duty, tariff and subsidy policies that affect creation and trade incentives should be harmonized to avoid recurrence of trade disputes and recurrent use of anti dumping regulations. As India offers a lot of subsidies to its suppliers in various forms and shapes the smaller countries are hesitant to permit MFN status to India. The recourse to a long negative list that restricts the volume of trade should be averted no matter what.
c)Macroeconomic plans such as fiscal and economic plans should be harmonized to attain a well balanced, non-discriminatingmacroeconomic environment for all your countries in the region
d)Supporting institutions to manage and assist in integration, for example, establishing standards, establishing regional development funds as well as for dispute quality should be created.
e)Communication and transportation infrastructure between your bordering countries should be better and upgraded to help increased trade and factor ability to move.
f)Legal restrictions for investor security, intellectual property privileges enforcement, anti-trustlaw, commercial laws, labour relations, financial institutions should be harmonized.
g)Financial markets should be widened and regulatory changes created to promotecross-borderinvestment, entries, syndication, connection issues, etc.
Finally, I use the impact of WTO. I wish to clear the misunderstandings that as though something extreme or surprising or unknown is going to hit us in the near future credited to WTO. All the countries in your community are already associates of this company since 1995 and also have made binding commitments to maximum tariffs. In some instances the applied tariffs are less than the certain tariffs. In actual practice, the South Asian countries have liberalized their imports and also have been flooded with cheaper imports from China in the recent years. There could be no greater risk to the success of home industry than competition from Chinese language goods. Some commercial firms could not face the onslaught of this invasion and have died. Others took up by the task by cutting system. drawing. bitmap, taking up the slack, becoming cost efficient, improving quality are competing with the new entrants. Thus the procedure of restructuring and move is ongoing and really should not present any systematic hazard to the sectors of the region.
What most of us seem to be to be concentrating upon is the abolition of the textile quotas under thematic-fibreagreement and the adoption of new arrangement on Clothing and Textiles in January 2005. The impact of this new style of textile trade on the economies of South Asia region is highly assorted and differentiated. Most simulation studies and modelling exercises carried by the earth Lender, USITC and 3rd party consulting organizations give credence to the view that China followed by India and Pakistan will be the key beneficiaries of the abolition of quotas. These countries are vertically included i. e. , from producing cotton completely to completing, dyeing, stitching, etc. and revel in low wage costs and low raw material costs. Pakistan, for example, has spent $3 to 4 billion during the past five years to modernize and acquirestate-of-the-artmachinery that can produce quality goods according to the varying features and changing demand patterns of the purchasers. On the other hand it is not evident if all the ready made garment exporting firms in Bangladesh and Sri Lanka can make it through in the post 2005 markets. Both countries are seized of the problem and are taking steps to assist their firms and their workers.
Doha Development Round should be resumed as soon as possible because long lasting benefits of regional trading blocks they are no replacement for contribution in multilateral trade plans. These arrangements give a much bigger market to exploit which is several times the size of any regional stop Multilateral arrangements expand the market access substantially and invite wider competition, greater scale of operation and higher specialization all of which increase efficiency and progress.
South Asia has made substantial progress in the last decade to incorporate in the World market but given its slow-moving start and preliminary handicaps there is a need for much rapid speed for liberalizing trade, getting Foreign immediate investment, assimilating new technology, improving human being skills and actively participating in regional and multilateral preparations.
Economic development and poverty lowering require ever expanding economical resources, which can only just be generated through high economic growth. Openness is available to positively impact after economic growth by causing investment more fruitful and successful and by nurturing bonuses for new investment. Southern Asian countries confronted with a high degree of poverty will profit enormously from openness, integration on the planet economy and making the most of benefits of globalization.
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