South Asian Economic Development, Second Edition

South Asian Economic Development

South Asia’s developing nations have been enjoying moderate to high growth over the past decade before the global recession began. This new edition provides an upto-date guide to the growing markets in South Asia. It offers an analysis of the changes and consequences of high sustainable growth, investigating what has been achieved in the region during the last ten years from a macroeconomic viewpoint, identifying new challenges and clearly defining what has driven the boom. The first part of the textbook presents an analysis of how South Asia is rated against Southeast and East Asia in recent decades in economic and social terms. The second part focuses on South Asia’s economic development over the 1990s and mid-2000s, and the third and final part identifies those major governance issues which were responsible for South Asia’s underperformance both socially and economically. It is widely recognised that globalisation enhanced global trade, and that trade further increased the region’s prosperity. Embracing the view that economists can no longer regard themselves as technocratic guardians of neutral policy advice, the book advocates for a shift in focus from policy reform per se to the more challenging task of implementing institutional reform that will invigorate the capability of the political leadership to bring about rapid, sustained and poverty-reducing growth in South Asia. The central task would be to re-direct the focus of governments in South Asia in order to ensure that the core functions of the state – stable, non-distortionary policy climate, a secure foundation of law, investment in basic education, health and infrastructure, protection of the vulnerable, and adapting to climate change – are efficiently provided. At the same time, the reform agenda must be sensitive to the goal of ensuring that durable democratic institutions, traditions and values are preserved. This is a fundamental challenge, but one that must be met in order to secure the emergence of a prosperous South Asia in the early part of the twenty-first century. This textbook will be useful for students and researchers in Development Economics, Business Economics, Development Studies and Asian Studies. Moazzem Hossain is Senior Lecturer in the Department of International Business and Asian Studies at Griffith University, Australia. Rajat Kathuria is Professor at the International Management Institute, New Delhi, India. Iyanatul Islam is Professor in the Department of International Business and Asian Studies at Griffith University, Australia.

South Asian Economic Development 2nd edition

Moazzem Hossain, Rajat Kathuria and Iyanatul Islam

First published 1999 Second edition published 2010 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 100016 This edition published in the Taylor & Francis e-Library, 2010. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Routledge is an imprint of the Taylor & Francis Group, an informa business © 2010 Moazzem Hossain, Rajat Kathuria and Iyanatul Islam All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Hossain, Moazzem South Asian economic development / Moazzem Hossain, Rajat Kathuria, and Iyanatul Islam. p. cm. Includes bibliographical references and index. 1. South Asia—Economic conditions. 2. Economic development. I. Kathuria, Rajat. II. Islam, Iyanatul, 1953- III. Title. HC430.6.H67 1999 338.954—dc22 2009024317 ISBN 0-203-86334-8 Master e-book ISBN

ISBN10: 0–415–45472–7 (hbk) ISBN10: 0–415–45473–5 (pbk) ISBN10: 0–203–86334–8 (ebk) ISBN13: 978–0–415–45472–8 (hbk) ISBN13: 978–0–415–45473–5 (pbk) ISBN13: 978–0–203–86334–3 (ebk)

Contents

List of figures List of maps List of tables Preface Acknowledgements

vii viii ix xiii xvi

PART I

Introduction 1 South Asian economic development: post-independence era

1 3

2 Benchmarking South Asian economic performance

22

3 Benchmarking South Asia’s human development in the era of ICT

31

4 Demographic dynamics of South Asia

38

PART II

South Asian economic development

45

5 Human resources and economic performance

47

6 Labour market institutions and economic performance

62

7 The Millennium Development Goals and the achievements to 2005

75

8 Macroeconomic management in the era of the information revolution

83

9 Economic reforms in South Asia

91

10 Trade and economic integration

109

11 Agriculture and rural development

137

12 Climate change, growth and poverty

152

13 Information technology (IT) issues

171

vi

Contents

PART III

South Asia in the twenty-first century

187

14 India’s growth on the back of the information revolution

189

15 South Asia in the twenty-first century: Seeking ‘good governance’ in the era of the information revolution

210

Appendix 1.1 Books and book-length monographs on South Asia: a random sample covering the 1960–2009 period

223

Appendix 14.1 Data definitions and sources

226

Appendix 14.2 Descriptive statistics

228

Appendix 14.3 The econometric model and detailed results

229

Appendix 14.4 State boundaries and mobile licences

233

Appendix 14.5 Operations by state

235

Bibliography Index

236 264

List of figures

10.1 10.2 10.3 10.4 10.5 10.6 11.1 12.1 12.2 14.1 14.2 14.3 14.4 14.5 14.6 14.7

Global trade and South Asia (imports plus exports, US$ million) Relative shares of South Asian trade (%) Bangladesh’s major export products (US$ million) India’s major export products (Rs million) Pakistan’s major export products (PRs million) Sri Lanka’s major export products (SRs million) Proposed three-tier local government institutions under the Ordinance 2008 Departures in temperatures in °C for the past 140 years (globally) and the past 1,000 years (northern hemisphere) Ecological footprint of selected developed and developing countries (hectares per capita) Mobile density and per capita income across Indian states Growth of fixed and mobile subscriptions Number of new subscribers Mobile penetration in India and comparator countries Airtime rate per minute in selected countries Measures of mobile usage across states March 2008 Urban vs. rural teledensity

118 119 121 124 126 128 149 168 169 192 195 198 199 200 203 205

List of maps

10.1 10.2 12.1

The three presidencies of British India: Bombay, Bengal and Madras China’s and South Asia’s coastal belt The Ganges, Brahmaputra and Meghna river basins

133 135 166

List of tables

1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 4.3 4.4 4.5 4.6 4.7

Initial conditions: per capita GDP and human development indicators, 1960–95, South Asia vs. Korea Per capita GDP of South Asian economies and Korea as a percentage of US GDP (PPP: US$) 1950–95 Sectoral growth rates 1991–94 and 2004–05 (%) Sectoral share of GDP 1990–2005 (%) Domestic savings and investment ratios (% of GDP) External trade annual change (%) Current account 1990–2005 (balance of payment in million US$) Integration with the global economy External indebtedness 1990–2005 Outstanding debt 2005 Major macroeconomic indicators 1990–2006 Major social indicators 1995–2006 South and Southeast Asia’s Human Development Record 1990s–2000s Changing level of poverty Income distribution and PPP estimates of GNP Eradication of extreme poverty Achieving universal primary education and promoting gender equality Reducing child mortality and improving maternal health Demographic conditions Population estimates and land use Distribution of population by age and dependence ratio 1996–2004 Labour force participation rates, by sector 1980–2005 Women in development in selected Asian countries 1990–2005 Female labour force 1990–2005 Contraceptive use rates 1995–2005

5 5 23 24 25 25 26 27 28 28 29 32 33 34 35 36 36 37 38 39 40 40 41 42 42

x

Tables 5.1

5.2 6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 10.1 10.2 10.3 10.4

Relative size of social expenditure in South Asia (as at 1995) vis-à-vis the 20:20 initiative of the UNDP (% of total central government expenditure) Private vs. social rates of return to education in South Asia (%) Distortion index for South Asia in factor markets in the 1970s Ratification of basic ILO conventions (as at 1994) Behaviour of real wages in South Asia (%) Demographic conditions Population estimates and land use Distribution of population by age and dependence ratio 1996–2005 Labour force participation rates, by sector 1980–2004 Female labour force 1990–2005 Fertility and contraceptive use rates 2000–05 Eradication of extreme poverty Achieving universal primary education and promoting gender equality Reducing child mortality and improving maternal health Trends in inflation rates, GDP growth and monetary expansion in selected countries Exchange rates 1988–2008 (in national currencies per US$) Trends in depreciation in nominal exchange rates in relation to US$ in South Asia Trends in external trade and trade balance (annual change, % of GDP) Ratios of export to imports (%) Growth of external debt 1987–2006 (US$ billion) Trends in the debt–service ratio 1985–2005 (% of exports) Official Development Assistance (ODA) received (net disbursement) Fiscal indicators 1998–2005 (% of GDP) Tariff reform Nominal tariff barriers in primary and manufactured products 2005 Quantitative restriction coverage (% of total production) Privatization performance 1994 Pakistan’s privatization record 1994 MVA growth rates and shares by country 1970–94 (%) FDI flows to South Asia 1990–2005 (US$ million) Key changes in India’s regulatory framework for FDI 1991–2005 Trends in South and East Asia’s trade integration (%) Recent trends in South Asia’s trade integration 2000–05 (%) Agricultural producer support, selected OECD nations (%) Private unrequited net transfers 1981–2005

56 57 67 68 70 75 76 77 78 79 80 80 81 82 84 85 85 86 87 87 88 88 89 93 93 94 95 96 96 106 107 110 110 113 115

Tables 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 12.1 12.2 13.1

Growth rates of merchandise trade of South and East Asian economies 1971–80 to 2000–05 (% per annum) Merchandise exports from South and East Asian economies 1990–2005 Regional trade matrix (imports plus exports) of South Asia (US$ million) Regional trade balance in South Asia (US$ million) South Asia’s trade balance (exports minus imports) with other regions (US$ million) Bangladesh’s balance of trade with major trading partners (US$ million) Bangladesh’s exports to major destinations (US$ million) Structure of merchandise and services trade, Bangladesh 1990–2005 (% of total) India’s balance of trade with major trading partners (US$ million) India’s exports to major destinations (US$ million) Structure of merchandise and services trade, India 1990–2005 (% of total) Pakistan’s balance of trade with major trading partners (US$ million) Pakistan’s exports to major destinations (US$ million) Structure of merchandise and services trade, Pakistan 1990–2005 (% of total) Sri Lanka’s balance of trade with major trading partners (US$ million) Sri Lanka’s exports to major destinations (US$ million) Structure of merchandise and services trade, Sri Lanka 1990–2005 (% of total) Merchandise exports and share of world exports 1990–2005 Japanese foreign direct investment in Asia 1951–88 Cereals and rice production in 1985–94 (five-year averages) (’000 tonne) Yield of cereal 1990/92–2003/05 (kg/ha) Agriculture value-added per worker in 2000 (US$) Average value of net imports of wheat and rice per year (US$ million) Export values of cash crops and allied products 1981–94 Adoption of seed-fertilizer-irrigation technology 1992–2003 Supply–demand gap for rice and wheat in India 2005–2026 (million metric tonnes) Current administrative units in Bangladesh Basic facts about Bangladesh Climate scenarios for Bangladesh in 2030 and 2050 The IT industry’s qualitative view on offshore outsourcing

xi 115 116 116 117 117 120 121 122 122 123 124 125 126 127 127 128 129 134 134 139 140 140 141 143 144 145 148 167 169 172

xii

Tables 13.2 13.3 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 A1.1

A14.2.1 A14.3.1 A14.4.1 A14.5.1

Selected IT industry performance corresponding to macroeconomic performance in India and Ireland in early 2003 India and China: a comparison on selected criteria All-India fixed, mobile, internet and broadband penetration rates Internet and broadband targets in millions of subscribers Mobile market shares March 2008 (%) Mobile coverage in selected countries 2007 (% of population covered by mobile network) Indicators for individual states Coefficient of variation across states A growth of mobile telephony in each state Universal service obligation funds (US$ million) Books and book-length monographs on South Asia: a random sample covering the 1960–2009 period Descriptive statistics Results of econometric models State boundaries and mobile licences Operators by state

173 177 196 196 199 200 201 202 204 206 223 228 231 233 235

Preface

The developing South Asian nations had been enjoying moderate to high growth over the decade immediately before the great recession hit almost all the economies of the globe in 2008. Living conditions improved in all nations of the region before 2008. What made this prosperity possible? It is now widely recognized that globalization enhanced global trade and more and more trade enabled this region to further prosper. For example, commodity trade, trade with services and expatriate workers employed in the Middle East and Southeast Asia (remittances) made a major breakthrough on the growth front. While South Asia has been making strong progress, new challenges have also emerged in recent years. The most important among them is climate change, which has a devastating impact on the economic and social aspects of the region. The present global economic slowdown will not help either. Like globalization, effects of climate change and global food, fuel and financial crises have no bounds. Thus, while the present version of South Asian Economic Development updates the economic and trade data between 1996 and 2006, the new issues of climate change, information economy and local governance are addressed as well. As in the first edition, the study focuses on the four populous economies of South Asia: Bangladesh, India, Pakistan and Sri Lanka. One may recall that in the 1950s and early 1960s, countries such as Sri Lanka and India were predicted by prominent economists to have a bright future. It causes considerable surprise in retrospect to note that, in 1950, Sri Lanka was considerably richer than some East Asian economies, such as Korea (in terms of per capita gross domestic product (GDP) as measured in purchasing power parity (PPP) dollars). Pakistan also had a higher per capita income than Korea. Indian industrialization started in the mid-nineteenth century. Korean industrialization lagged by at least 50 years. Yet, Korea is now a ‘high-income country’ (a member of the Organization for Economic Cooperation and Development (OECD), the club of the more developed nations). It has been a member of the OECD since 1996. However, Korea suffered from the fallout of the 1997 Asian currency crisis, but recovered sharply (within only three years, by 2000). The South Asian economies, on the other hand, continued to languish as ‘low-income’ economies until the mid-1990s. These economies, however, have been growing moderately after embracing economic reforms in the early 1990s and subsequently the

xiv

Preface

information revolution has been supporting an unprecedented telecommunications (mobile in particular) infrastructure in recent years, which has helped advance growth. It is this optimistic tale of two Asias that prompted the authors to take a renewed look at a group of South Asian economies in the present edition. With the economic reforms taking place from the early 1990s, the question is: Are the outcomes any better? Several studies of the World Bank in the post-reform era articulate that significant changes have taken place in at least the areas of poverty reduction and education in recent years (until 2007). Particularly in the case of Bangladesh and India, the Bank has been painting optimistic pictures. According to the Vice President of the South Asia Region of the World Bank, in 1991, 57 per cent of Bangladesh’s population was living below the poverty line. By 2000 this number came down to 49 per cent. Over the period 2000 to 2005, the poverty rate further declined to 40 per cent with around six million people lifted out of poverty. (www.worldbank.org) As far as the extreme poverty goes, the proportion of households living under a straw roof – a highly sensitive indicator of extreme poverty – fell from 18 per cent of the population in 2000 to 7 per cent in 2005. While this is certainly a phenomenal achievement for Bangladesh, the World Bank recognizes that the achievements of the East Asian and Southeast Asian nations, like China, Thailand and Vietnam, simply cannot be matched. For example, the poverty rate in Vietnam fell from 58 per cent in 1992 to 20 per cent in 2005. In other words, the Bank insists, although the proportion of poor in Vietnam was similar to that in Bangladesh in the early 1990s, it is now around half that in Bangladesh. The main reason Vietnam overtook Bangladesh is that Vietnam’s annual rate of growth was on average 2.5 percentage points higher than Bangladesh’s annual rate of growth during this period. One can make similar parallels between China and India. While India’s rate of growth has been impressive since the early 1990s, it also lagging behind China’s growth by almost 2.5 percentage points annually over the last decade (1995–2005). With such a comparative environment existing in two Asias, Part I of the present edition very closely analyses how South Asia rated against Southeast and East Asia in recent decades in economic and social terms. Part II generally deals with South Asia’s economic development over the 1990s and mid-2000s. Part III identifies the major governance issues which were responsible for South Asia’s social and economic relative underperformance. This study accepts the standard refrain that the policy regime is the primary and proximate influence on growth performance. However, we believe that the ideas and ideology that drive the convictions of political leaders are important in understanding why particular notions about appropriate policies are assimilated and others are rejected. Moreover, once a given policy regime takes hold, the disengagement from failed policies of the past can easily become a slow and faltering process, largely because political influences reinforce initial policy choices. This in

Preface

xv

turn condemns particular economies to protracted periods of modest performance and even stagnation. Such a sympathetic and nuanced interpretation is important in understanding why the South Asian economies were unable to reach a phase of rapid, broad-based growth in the 1970s despite optimistic predictions about their future in the 1960s and even the 1950s. This study also accepts the standard refrain that policy reform entailing macroeconomic stability, trade liberalization (including a hospitable climate for foreign investment), privatization and deregulation and determined public action in the areas of basic education and health are the key ingredients of national economic success. This may be construed as a mere reaffirmation of current orthodoxy, but it is difficult to ignore the robust edifice of theory and evidence that has built up over decades. This study embraces the view that economists can no longer regard themselves as technocratic guardians of neutral policy advice. This means focus must shift from policy reform per se to the more challenging task of implementing institutional reform that will invigorate the capability of the political leadership to bring about rapid, sustained and poverty-reducing growth in South Asia. The central task is to redirect the focus of governments in South Asia in order to ensure that the core functions of the state (i.e. a stable, non-distortionary policy climate, a secure foundation of law, investment in basic education, health and infrastructure, protection of the vulnerable and protection of the environment) are efficiently provided. At the same time, the reform agenda must be sensitive to the goal of ensuring that durable democratic institutions, traditions and values have been preserved. This is a fundamental challenge, but one that must be met in order to secure the emergence of a prosperous South Asia in the early part of the twenty-first century. This edition is the product of the collective efforts of three authors, particularly in terms of planning and designing and collecting research materials. Any remaining errors and omissions are the collective responsibility of the authors. Brisbane April 2009

Acknowledgements

This book was supported by financial assistance from the Griffith Business School of Griffith University, Australia. This assistance enabled Hossain to take time off from the daily routine of work and spend some time overseas as part of his sabbatical leave. He paid a few visits to India over 2005 and 2008. He collaborated with Professor Rajat Kathuria of the New Delhi-based International Management Institute (IMI). Hossain also benefited from attending several conferences of the National Association of Software and Services Companies (NASSCOM), based in New Delhi, on the subject of India’s information and communications revolution since the mid-1990s. Kathuria gratefully acknowledges the support of Dr Mahesh Uppal and Mamta of the Indian Council for Research on International Economic Relations (ICRIER), based in New Delhi. They jointly produced the chapter on the econometric analysis based on a field survey on mobile phones in India (Chapter 14). This study was supported by Vodafone Group and published earlier in the policy paper series of the ICRIER in January 2009. Islam is one of the authors of the first edition of this volume. Some of his works have been adopted in this edition as well. He would like to acknowledge the support of the World Bank while preparing his contributions. The work of Reza Kibria for the first edition was helpful in updating some financial and environmental data in the present edition. We once again acknowledge his support and cooperation. Robyn White of the Department of International Business and Asian Studies of the Griffith Business School applied her inimitable skills in transforming a chaotic manuscript into a readable draft. The authors gratefully acknowledge her support. Moazzem Hossain Rajat Kathuria Iyanatul Islam

Part I

Introduction

1

South Asian economic development Post-independence era

South Asia consists of a number of states of very disparate size and complexity. It ranges from the vast economy of India, with a population of more than 1.2 billion, which ranks fifth in the world in terms of industrial production, to the tiny Maldives, with a population of about 300,000 and an economy primarily based on fishing and tourism. The South Asian region bears the dubious distinction of being home to more than 400 million (20 per cent) of the world’s poorest people. It also accounts for approximately 50 per cent of the world’s malnourished children (Haq and Haq 1998: 14). The global mission to reduce poverty in the developing world will be substantially enhanced if one can successfully engender rapid and sustained growth in the region. This study focuses on the four populous economies of South Asia: Bangladesh, India, Pakistan and Sri Lanka. This is partly due to pragmatic reasons (i.e. constraints of time and resources and ready availability of information and analyses) and partly due to the need for finding regional generalizations that can in turn be linked to the key issues in the broad domain of development studies. The smaller economies of the region represent distinct policy challenges and particular circumstances that cannot be easily accommodated to the goals set in this study. The story of the four South Asian economies can be described as a case of a promising beginning that never quite consolidated into sustained economic success. They were – or at least some of them were – endowed with initial conditions that were, in many ways, better than those faced by some of the East Asian economies. This is a conspicuous fact because many of the economies of East Asia – the Northeast Asian industrial giants of Taiwan (Province of China), South Korea and mainland China, the vibrant city-states of Hong Kong and Singapore and the dynamic Southeast Asian economies of Indonesia, Malaysia and Thailand – have attracted worldwide attention as rare exemplars of rapid, sustained, shared and poverty-reducing growth. Admittedly, some of these success stories (such as Thailand, Malaysia and Indonesia) have gone through a period of turbulence since the 1997 financial crisis, but one cannot be but impressed by the enduring results of the ‘East Asian miracle’. Today, South Asia is often exhorted to learn from success by ‘looking east’. Yet, as Hicks (1989) notes, there was a time when prominent economists predicted that countries such as India and Sri Lanka would be the economic success stories of the post-Second World War period.

4

Introduction

The above discussion has alluded to the type of methodology that is best suited to the analysis of national economic success or failures. One can – as this study does – adopt an explicitly comparative perspective. Alternatively, one can undertake an in-depth examination of individual countries. Both approaches have their merits, but the literature on South Asian economic development seems to be dominated by country-specific expertise (especially on India) rather than scholarship that seeks regional generalizations. As Table A1.1 (see Appendix 1.1) shows, out of the selected sample of more than 50 books and book-length monographs spread over the 1950–2005 period, one can find only ten studies that can be strictly classified as approximating the genre that characterizes this book: an overview of development economics in a broad regional setting. Several of these studies are quite dated (in terms of facts, not necessarily in terms of ideas!), given that they were published in the 1970s and 1980s. Hence, one can claim with some justification that this second edition will not be overwhelmed by a crowded field. The focus of this chapter is on initial conditions, but it also reflects on some of the reasons behind the rather gradual and hesitant disengagement from inappropriate policies of the past that lie behind the protracted period of modest performance of the economies of the region over a period of almost half a century. One hopes that such an analysis will provide a pertinent background for appreciating the agenda of reform that will occupy South Asia as it embraces the present millennium.

Initial conditions This section develops the following themes: • •

The South Asian economies were, in some respects, better off than some East Asian economies in the 1950s and 1960s – a point that was noted above. The legacy of British colonial rule that South Asia inherited was, in some respects, a boon rather than a burden when one considers the tradition of fiscal conservatism, the development of a modern civil service and the advanced nature of industrialization in colonial India relative to world norms.

Reflecting on a case of failed potential: South Asia in the 1950s and 1960s ‘The 1960s’, observes Bruno (1995: 9), ‘look like the golden age of economic development’. This is an apt metaphor for South Asia. Consider Table 1.1. It compares GDP per capita (expressed in PPP terms: US$) and basic human development indicators of Bangladesh, India, Pakistan and Sri Lanka with South Korea (henceforth Korea) – an archetypal East Asian economy – in 1960 and 1995. The striking fact is that in 1960 Korea was poorer than Pakistan and Sri Lanka and was only marginally richer than Bangladesh and India. Yet, by 1995, Korea graduated to a ‘high-income’ economy (as classified by the World Bank). It became a member of the OECD in 1996 and is poised to reach the rank of ‘Group of 7’ (G7) nations by 2020 (Korea Development Institute 1995). The South Asian economies, on the other hand, remain laden with the dubious label of ‘low-income’ economies.

South Asian economic development

5

Table 1.1 Initial conditions: per capita GDP and human development indicators, 1960–95, South Asia vs. Korea Country

Bangladesh India Pakistan Sri Lanka Korea

GDP per capita ($PPP)

Adult literacy

Life expectancy (yrs)

1960

1995

1970

1995

1960

1995

621 617 820 1,389 690

1,380 1,400 2,230 3,250 11,450

24 34 21 77 88

37 51 36 90 95+

39.6 44.0 43.1 62 53.9

56 61 62 72 72

Sources: UNDP (1996); World Bank (1997)

Another issue worth emphasizing is that in 1960 India had already achieved one of the so-called ‘golden rules’ of growth as proposed by Lewis (1955), namely, that self-sustained growth requires a national saving ratio of 12–15 per cent. The saving ratio for India in 1960 was well within the Lewisian benchmark and never fell below it in subsequent years. In contrast, the national saving ratio for Korea in 1960 was apparently a mere 1 per cent (James et al. 1989: 64)! Table 1.2 extends the notion of initial conditions by focusing on the notion of ‘convergence’ over the 1950–95 period – that is the extent to which the economies being considered have, over the designated period, converged to US living standards (also measured in per capita PPP dollars). The basic notion behind convergence is that poorer economies grow faster than richer nations (using USA as a benchmark) and – as a result – catch up with their affluent counterparts (Helliwell 1994). As expected, there is rapid convergence in the case of Korea, but hardly any such evidence for South Asia. This simply reflects the rather different growth rates that were achieved – particularly after the 1960s. Per capita real income growth rates in the 1960–70 period for South Asia as a whole was 1.8 per cent vis-à-vis 2.0 per cent – hardly a difference worth noticing. After the 1960s, the divergence became overwhelming: East Asia grew at rates (in per capita terms) that were overwhelmingly faster than Southern norms (UNDP 1996). Table 1.2 Per capita GDP of South Asian economies and Korea as a percentage of US GDP (PPP: US$) 1950–95 Country

1950

1960

1970

1980

1995

Bangladesh India Pakistan Sri Lanka Korea

— 7.1 9.0 11.4 7.6

8.3 7.5 7.8 10.2 8.2

7.0 6.5 8.4 9.4 11.8

6.5 5.7 7.6 9.4 24.8

5.1 5.2 8.3 12.1 42.4

Sources: Pre-1995 figures: Kravis et al. (1982, Table 1.4); Helliwell (1994: 24); 1995 figures: World Bank, 1997 Note Bangladesh was part of Pakistan until December 1971.

6

Introduction

The case of Sri Lanka is particularly striking. Even as far back as 1950, Sri Lanka’s average income was almost twice the level of that of Korea and its life expectancy in 1960 was significantly above the developing country standard. Not surprisingly, Sri Lanka attracted the epithet of the ‘best bet in Asia’ (Jiggins 1976). Yet, the best bet in the region simply fell behind. One could argue, of course, that relative income levels tell a misleading story. School enrolment rates in Korea in 1950 and 1960 were well above the norms achieved by Bangladesh, India and Pakistan so that by 1970 the gaps in adult literacy among this group widened very sharply (see Table 1.1). Some observers highlight this difference to explain the emergence of the Korean economic miracle. Thus, Birdsall et al. (1995) calculate that if Korea had Pakistan’s enrolment rate of 1960, its 1985 level of per capita GDP would have been 40 per cent lower than what was actually attained. Yet, there are nagging puzzles. Athukorela and Jayasuriya (1994: 29) note that in 1950, Sri Lanka’s school enrolment rate was markedly higher than Korea’s (54 per cent vs. 43 per cent). Why did Sri Lanka languish and fail to capitalize on its initial endowments while Korea flourished? One could invoke the incidence of internal political strife in Sri Lanka, but this really emerged in the 1980s, 20 years after the presence of growth-promoting initial circumstances! Yet another possible explanation lies in the perennial issue of reliability of data. The cynic could note that one is dealing with dubious statistics: Sri Lanka was simply not as well off in the 1950s and 1960s as the income figures and human development indicators suggest. While such doubts are well-founded, they are invariably difficult to resolve. It is beyond the competence of this book to offer firm judgements on the reliability of key statistics in Sri Lanka (and South Asia in general) vis-à-vis Korea (and East Asia in general). In the absence of pertinent expertise, this study seeks refuge in an agnostic assumption: while the overall quality of data varies over time, there are no systematic region-specific biases, so that key statistics on country A are as good (or as bad) as country B. One needs to move away from a mere emphasis on relative income levels (or even human development indicators) and provide a more complex interpretation of initial conditions by emphasizing historical legacies and institutions. It is at this juncture that one can emphasize common traditions that bind the economies of the region together – despite frequently highlighted differences in religion and ethnicity. The legacy of British colonial rule All four economies share the legacy of British colonial rule: the present-day legal systems and administrative and political structures of each still exhibit striking similarities to those of the British colonial period. The role of this legacy in influencing the evolution of the South Asian economies can be interpreted in different ways. One could argue that the colonial administrative structures were geared to the simple tasks of revenue collection and the maintenance of law and order rather than the much more complex tasks of social and economic development within a

South Asian economic development

7

democratic framework. The four South Asian nations, according to this interpretation, could not really liberate themselves from the shackles of history because they failed to creatively adapt the colonial administrative structure to the needs and exigencies of the modern state. The weight of theory and evidence suggests a more complex interpretation. One could argue that the South Asian economies in fact reacted against the perceived burden of history by uncritically embracing the dirigiste doctrine (more on which later) and thus gradually undermined the tradition of fiscal conservatism of the British colonial period. As Little et al. observe: Britain bequeathed to its former colonies both a Gladstonian tradition and an administrative setup conducive to ‘treasury control’ . . . Both survive in India and Pakistan, although they seem to be weakening over time. They were gradually undermined in Sri Lanka under . . . populist administrations . . . in the early 1960s and 1970s and could not be easily revived . . . (1993: 374) The tradition of conservative fiscal convictions was institutionally embedded. Corea (1965) and Gunasekara (1962) have drawn attention to the fact that Sri Lankan macroeconomic management was constrained by the British Currency Board System, which did not allow the conduct of independent monetary policy and did not permit deficit financing. These institutional arrangements were jettisoned after the formal disengagement from the British Raj. This development appears particularly ironic in light of contemporary debates on the need to enhance the institutional capability of developing economies to pursue prudent macroeconomic policies. As the subsequent chapters note, there is an emerging consensus that fiscal conservatism is an essential element of prudent macroeconomic policy and it needs to be embedded through a range of informal and formal mechanisms. As Fry (1991) and Lim (1995) emphasize, the South Asian economies are now struggling to come to terms with the weak fiscal position of central governments. They are being constantly exhorted by multilateral agencies, scholars and practitioners to engage in comprehensive fiscal adjustments. Such developments testify that South Asian policymakers failed to build on the historical bequest of fiscal restraint and adapt it to the needs of a post-colonial economy. Beyond the issue of fiscal prudence, there is a broader element of the British colonial legacy that deserves comment. The development of a professional civil service stands out. The colonial administrative structure in India was apparently so well developed in terms of professional procedures pertaining to recruitment, pay and promotion that it set a precedent for the reform of the civil service in England in the 1850s (World Bank 1997). Thus, the civil service model in the colonial period set the benchmark for the subsequent development of the civil service in the post-colonial Indian subcontinent. In the realm of industrialization, British colonial rule in South Asia made a major impact. Several observers have remarked that colonial India (of which Pakistan and Bangladesh were part) was one of the pioneers of Third World industrialization

8

Introduction

(see, for example, Bhagwati and Desai (1970), Kumar (1983), Bhattacharya (1979), Lal (1988, 1989, 1986), Lidman and Domerese (1970)). Here are some intriguing observations: •

•

•

Industrialization in colonial India began in the 1860s and the ‘. . . rate of growth of Indian industry . . . during the latter part of the nineteenth century has not been bettered since’ (Lal 1988: 199). ‘By 1914 the Indian economy had developed the world’s fourth largest cotton textile industry and second largest jute manufacturing industry’ (Lidman and Domerese 1970: 320–1). By 1913, 20 per cent of Indian exports were of modern manufacturing goods and total exports amounted to approximately 11 per cent of national income – ‘. . . a share not reached either before or since’ (Lal 1988: 200).

In contrast, the historical evolution of Korean industrialization appears much less impressive. To start with, modern industry in Korea took root at least 50 years later than India, that is from approximately 1910 with the onset of Japanese colonization (Chowdhury and Islam 1993: Ch. 2). This coincides with a period when industrialization in colonial India had reached maturity by prevailing standards. Ho (1984) also notes that the industries in colonial Korea were not efficient by world standards because they were not based on the criteria of comparative advantage but evolved to meet Japanese needs. In contrast, Lal (1989) emphasizes that the peak of industrial growth in colonial India coincided with a period of laissezfaire and free trade in the British Empire and decelerated with the onset of protectionist barriers. Tariff rates calculated from data provided in Kumar (1983: 924) show that tariff rates went up from an average of 7 per cent in the 1920s to 31 per cent by 1932. It also needs to be emphasized that the industrial base that Korea inherited from Japanese colonial rule was characterized by a high degree of regional concentration (Woo 1991): most of the heavy industry was located in the North. This meant that the division of the Korean Peninsula into North and South after the Korean War (1953) almost completely denuded the industrial base of South Korea. More than 80 per cent of the heavy industries went to North Korea. The Korean War also led to widespread destruction of life, property and infrastructure. Admittedly, the division of the Indian subcontinent in 1947 into two independent states (Pakistan and India) was also surrounded by extreme destruction and violence. It also meant that the industrial base had to be carved up, but the aftermath was by no means as dramatic as the aftermath in which Korea found itself in the 1950s. In sum, the legacy of British colonial rule inherited by South Asia placed it at a distinct advantage over an archetypal East Asian economy. This advantage became more conspicuous in the 1950s as Korea tried to cope with the ravages of the Korean War. Admittedly, it would be utterly naive to ignore the serious weaknesses and limitations of British colonial rule. Like all imperial experiments, it exacted a heavy cost in terms of the destruction of indigenous industries and the denial of self-esteem

South Asian economic development

9

for its subjects that only the acquisition of national sovereignty could restore. The British Raj also made inadequate investments in infrastructure, including education (Thavaraj 1960). In this respect, Japanese colonial rule appears to have had an edge (Ho 1984). Finally, one cannot avoid the fact that the British Raj was conspicuous for its failure to prevent famines (Sinha 1968) – a dismal record of human tragedy that never recurred in post-colonial and democratic India. Despite such caveats, the notion that British colonial rule provided the foundations for economic growth in South Asia remains intact.

Evolution of South Asian economies: the role of ideas and ideology Identifying initial and post-independence conditions represents an important and fundamental step in understanding the evolution of national economies. Such an investigation has in turn generated a central question: Why has South Asia failed to capitalize on its initial endowments? Some tentative suggestions were offered in the previous discussion, but the issue needs to be re-visited in greater depth. From the perspective of an economist, the particular policies that are adopted ultimately influence growth performance. The theme of this section is that ideas and ideology that drive the conviction of political leaders are important in understanding why particular notions about appropriate policies are assimilated and others are rejected. Moreover, once a given policy regime takes hold, the disengagement of failed policies of the past can easily become a slow and faltering process, largely because political influences reinforce initial policy choices. This in turn condemns particular economies to protracted periods of modest performance and even stagnation. Such a sympathetic and nuanced interpretation is important in understanding why the South Asian economies were unable to reach a phase of rapid, broad-based growth in the 1970s, despite optimistic predictions about their future in the 1960s. From the dirigiste doctrine to issues in governance: an overview Soon after gaining independence from British colonial rule, South Asia – in common with many countries in the developing world – embraced a development strategy whose key components formed the substance of the so-called ‘dirigiste doctrine’. This may be construed as an expression with pejorative overtones, but it is used here as a shorthand reference for a set of interrelated elements that form part of an overall policy approach. These elements include: • • • •

import-substituting industrialization (ISI); extensive state intervention in financial and labour markets; a significant reliance on state-owned enterprises (SOEs); a general predilection for detailed planning and regulation.

It should be emphasized that the precise timing of the onset of dirigisme in South Asia varied from country to country. India moved in a resolute manner from the

10

Introduction

eve of independence. In the case of Sri Lanka, import controls really started in earnest around 1956. The case of Bangladesh also deserves to be highlighted. It was part of Pakistan until 1971, when it emerged as an independent nation after the termination of a bitter civil war that exacted a heavy toll in terms of human lives and destruction of property and infrastructure. The adoption of the dirigiste doctrine in Bangladesh owes more to the particular circumstances of its history than to a conscious intellectual predilection among its politicians and policymakers. The process, as Turner and Hulme (1997: 178), drawing on Chowdhury (1992: 57–70), demonstrate, started in a fairly innocuous fashion. The political leaders, who found themselves in power in an independent Bangladesh, traditionally espoused centrist economic philosophies. They really did not have the ideological conviction or the organizational capacity to oversee an economy that was centrally controlled. Things changed inadvertently after the nine months of bloody civil war that preceded the acquisition of independence in December 1971. The government found itself picking up the ownership and management of 725 industrial units – representing 45 per cent of the country’s fixed assets in the industrial sector – because they were abandoned by its non-local owners who left the country. Within a few months, the government decided to embark on a programme of nationalization of jute, sugar and textile industries. This pushed the state ownership of modern industry from 34 per cent in 1971 to 92 per cent by mid-1972. Furthermore, all banks were nationalized and reconstituted into six banks. The ideological basis for this development was subsequently provided by the inclusion of socialism as one of the pillars of the Constitution. A detailed analysis of the causes behind this ambitious and sudden expansion of state ownership in Bangladesh is beyond the scope of this study, but the strategic context in which Bangladesh found itself matters. Both India and the former Soviet Union were the key allies of Bangladesh. They supported the political leadership militarily and financially in its fight to carve out a new nation. It does not seem too far-fetched to suggest that a grateful group of politicians and policymakers felt obliged to embrace the dirigiste ideals of India and the former USSR. With the benefit of hindsight, one can argue that the dirigiste doctrine in South Asia and elsewhere was misguided. Its inherent weaknesses have been exposed by the turbulent era of the 1970s and 1980s as issues in macroeconomic stabilization and structural adjustment became the global agenda for coping with traumatic change. Its decline has been precipitated by the dismantling of the Soviet Union and East European bloc. At the risk of some degree of overstatement, one can maintain that dirigisme lies at the root of the key problems that afflict the contemporary South Asian economies: low to moderate saving and investment (although India seems to have fared better than the regional average), low human development (with the exception of Sri Lanka), weak fiscal position of the government, inefficient state-owned enterprises (SOEs) and insufficient engagement with international markets. The policy prescriptions for coping with these problems are, by now, well known. Thus, there is the need for a credible commitment to fiscal prudence

South Asian economic development

11

as a core element of macroeconomic stability, determined public action in the areas of basic education and health, privatization and deregulation of both product and factor markets, a resolute move towards trade liberalization, creation of a conducive climate for the acquisition of foreign capital, human development and technology and the pursuit of regional co-operation within a multilateral framework. A focus on comprehensive policy reform in South Asia (and elsewhere) has gradually led to the realization that economists can no longer be technocratic guardians of neutral policy advice. Considerable research efforts are being invested by scholars and practitioners in trying to identify the elusive institutional variables that underpin the policy-making capacities of governments. This evolving intellectual tradition is typically subsumed under the rubric of ‘governance’, a term that tries to capture studies that focus on the ability of governments to promulgate and credibly implement appropriate economic and social policies as a means of understanding why some economies flourish and others falter. The issue of governability has clearly infected current thinking on development policy (World Bank 1997), but one can detect antecedents of this in the 1970s and earlier (back to Adam Smith!). Bauer (1971: 27), for example, admonishes developing countries for their ‘preoccupation with central planning (that) has, paradoxically, contributed to serious neglect of essential government tasks . . .’. These early reflections have proven to be remarkably prophetic. Issues of governability occupied the 2000s and the early part of this millennium. The intellectual roots of the dirigiste doctrine Why were the first-generation politicians and practitioners attracted to state-led development that entailed detailed planning and regulation and a focus on domestic markets? One has to understand the power of economic ideas and the way such ideas get assimilated in the political process. As Krueger (1993a: 353) acknowledges: ‘There is ample reason to believe that, in many developing countries, the initial choice of an import-substitution development strategy was made by well-intentioned individuals behaving as benevolent social guardians.’ The intellectual underpinnings of dirigisme can be traced to the work of a number of ‘first-generation’ development economists, such as Rosentein-Rodan, Nurkse, Singer, Prebisch and Myrdal (see Arndt 1987: Ch. 3). Bhagwati (1984) has re-interpreted this strand of scholarship as encompassing the twin notions of export pessimism and market failure. The export prospects of the primary products of developing economies were seen to be limited. In addition, international trade was seen as a mechanism of international inequality enriching the rich nations and impoverishing the poor – a view that developed into ‘dependency theory’ (e.g. Furtado 1973; Sunkel 1969). The typical developing economy was also characterized by endemic market failure expressed specifically as the failure of private producers to internalize external economies (Rosentein-Rodan 1943). Mainstream economics was belittled as a ‘special case’ reared in the cultural, social and political context of Western market economies (Seers 1962). These concerns evolved to a

12

Introduction

stage where they entailed a focus on state-led, ‘big-push’ industrialization that relied primarily on domestic markets. It is in such a prevailing intellectual milieu that the first-generation policymakers in South Asia and elsewhere put dirigisme into practice. The notion of autarkic industrial development was particularly influential in India through the role of Mahalanobis, ‘physicist turned planner’ (Arndt 1987: 76). India was one of the first – if not the first – country in the developing world to produce a meticulously detailed development plan (it ran to 671 pages!) in 1952 (Turner and Hulme 1997: 136). It causes considerable surprise in retrospect to realize that the author of this plan – the Indian Planning Commission that was set up in 1950 – became the precedent for the creation of the Economic Planning Board in Korea in 1961, but with rather different results (Haggard 1990). The demise of the dirigiste doctrine: the early literature It is often suggested that the tide against dirigisme turned with a landmark report on a comprehensive evaluation of ISI in seven developing economies (which included some South Asian countries) by Little, Scitovsky and Scott (1970), but one can detect dissenting voices well before the publication of this report (Rodrik 1992). To take one prominent example, Raul Prebisch, regarded as one of the prime intellectual architects of ISI, apparently raised concerns about the viability of ISI in his later writings (Arndt 1987: 78–81). Power (1963) was one of the first applied studies of the impact of ISI. He regards Pakistan as a case of ‘frustrated take-off’ and pins the blame on ISI – although the prevailing perception was that Pakistan was a successful case of ISI (Papanek 1967). Despite such examples of dissent, it would be fair to say that the Little et al. (1970) report provided the primary intellectual ammunition against ISI. In retrospect, one is struck by the potency of its observations: The studies on the seven countries indicate that . . . policies that are followed to promote import substitution are harmful for the economic development of these countries. Industrialization sheltered by high levels of protection had led to the creation of high-cost industries . . . With high industrial prices, maintained behind high tariffs, industrialization has been carried out at a high cost to agriculture . . . Ponderous administrative control has held up decisions and has led to excessive stocks and the creation of a multitude of firms operating below capacity . . . The most serious result of these policies, however, is that the nascent industries have come to depend on their profits on government decisions, and so have formed the habit of devoting their efforts to obtain privileges by pressure on the government rather than by cutting costs. (Little et al. 1970: xviiiff) The emerging critique of ISI at the beginning of the 1970s was given a major boost by subsequent contributions (see, for example, Bhagwati 1978). One must also note the seminal contributions of McKinnon (1973) and Shaw (1973) on the

South Asian economic development

13

deleterious effects of interventions in financial markets that broadened the attack on dirigisme. These studies argue that such policy measures as selective credit allocation and general controls on interest rates led to ‘financial repression’. This in turn had ‘real sector’ effects: both the volume and efficiency of saving and investment were adversely affected. The net result was a drag on growth. Debates on interventions in financial markets continue to occupy current debates in development policy. It appears that the early enthusiasm that greeted the thesis of ‘financial repression’ with its clear message of the need to liberalize financial markets is being replaced by a more cautious view. There is a greater sensitivity to the complexity of the reform of financial markets and appreciation of the fact that it cannot be seen as the panacea to the economic problems that plague many developing countries, including South Asia. The issue of interventions in labour markets, and the way they formed part of a comprehensive critique of dirigisme, appears to have received less attention in the early 1970s. In the 1980s, a contribution by Fields (1984) drew attention to the thesis that variations in labour market interventions could partly explain variations in growth performance in the seven economies that he studied. The analysis of the relationship between interventions in labour markets and economic performance subsequently became embroiled in contentious interpretations on coercive labour legislation as the necessary price to pay for rapid growth (Deyo et al. 1987). Current debates on the role of the labour market in economic development seem to be shifting in a different direction. One detects the emergence of a more circumspect view that is questioning earlier, strident versions that labour market interventions per se are inimical to growth (see details in Part II). The rise and decline of dirigisme in South Asia South Asian policymakers were not completely unresponsive to the early warning signs of a range of problems affecting ISI. In fact, attempts at trade liberalization were made in 1964 in Sri Lanka (Athukorela and Jayasuriya 1994) and in 1966 in India (Lal 1995) – a timing that was quite close to the much-vaunted policy reforms that were implemented in East Asia. Sri Lanka also followed this up with a more comprehensive programme of liberalization after 1977. The programme was eventually undermined by an unsustainable public sector investment boom and the rise of ethnic hostility (Athukorela and Jayasuriya 1994). A study in 1967 even lists Pakistan among a group of countries that were successfully making the transition to export-oriented industrialization (Keesing 1967). Despite such examples of episodic trade liberalization in the 1960s and 1970s, the fact remains that the South Asian economies were still less open than their Southeast and East Asian counterparts at the beginning of the 1980s. Thus, the average tariff rate varied from 6.5 per cent in Singapore to 33 per cent in Indonesia; the corresponding rates ranged from 75 per cent in Bangladesh to 44 per cent in Sri Lanka (James et al. 1989: 33). The picture has changed for the better since the early 1990s thanks to the economic reform measures taken in almost all of the nations (see more in Part II).

14

Introduction

Why has there been such a slow dismantling of dirigisme in South Asia? Why is the region still some way behind – perhaps by a decade – than even Southeast Asia in terms of a vigorous adoption of economic reform? What are the forces that are at work in propelling the economies of the region towards further change? The answers to these compelling and complex questions are by no means simple and obvious, but some suggestions can be made. Some authors, such as Lal (1989, 1995) and Bhagwati (1993), find cultural antecedents. Thus, in India, ‘Brahmin’ bureaucrats with an entrenched disdain for business and an ingrained attachment to Fabian socialism remained wedded to the policies of the past. This was reinforced by a prickly nationalism that was manifested in a predilection to shun foreign markets and external expertise. Attitudes displaying prickly nationalism can, of course, be encountered in many parts of the world and are not the preserve of Indians. Despite this, an antibusiness, Brahmin bureaucrat model (reflecting India’s caste-ridden society) cannot be easily generalized to the rest of South Asia. In Pakistan, for example, one has always detected a coy alliance between the military, bureaucrats and big business (the so-called ‘22 families’ in the 1960s), an alliance that supported dirigisme, condoned the unequal distribution of economic benefits between East (presently Bangladesh) and West Pakistan and contributed to the tragedy of 1971 (Adams and Iqbal 1983). In the case of Sri Lanka, the model of the Brahmin bureaucrat clinging tenaciously to the tenets of regulation and control is also difficult to uphold, given that Sri Lanka made moves towards trade liberalization in the 1970s on a more significant scale than India did. Inter-ethnic hostility and the political difficulty of dismantling welfare subsidies probably played a role in slowing down the reform efforts. In Bangladesh, the emergence of a highly successful exportoriented garments industry in the early 1980s bears testimony to the ability of private enterprise to circumvent the limits posed by inward-oriented industrialization. The fact that an overall policy thrust towards much greater openness has not emerged is a reflection of entrenched political forces rather than a culturallydriven, anti-business ethic of the state. While country-specific factors are at work in restraining the capacity of the economies of South Asia to make a comprehensive and credible commitment to policy reform, there are common forces at work that suggest that the momentum for change will not go away. One of the common forces is represented by external actors – most notably multilateral and other international agencies who act as conduits for the transmission of new ideas and ideology pertaining to policy management. Studies on East Asia have consistently drawn attention to the fact that US aid advisers played a significant role in facilitating the policy change in Korea and Taiwan (Haggard 1988, 1990, 1994). It is worth remembering too that the intellectual onslaught against dirigisme was ushered under the tutelage of the OECD (the sponsor of the work by Little et al. 1970), the Asian Development Bank (the sponsor of the work on ISI in Southeast Asia) and the US-based National Bureau of Economic Research (NBER) (sponsor of the comprehensive studies by Bhagwati, Krueger and others). The World Bank took up this mission at a later

South Asian economic development

15

stage with a great deal of zeal and vigour and ushered in an era of ‘structural adjustment lending’ (SAL) in the 1980s. The antecedents of SAL may be seen in the well-established approach that the IMF has used extensively in dealing with countries undergoing balance of payments (BOP) crises (Killick and Bird 1984). SAL, however, has tried to deliberately differentiate itself from the IMF approach by emphasizing medium-term and long-term issues in policy reform rather than limiting itself to short-run stabilization issues (which is seen as the preserve of the IMF). SAL may be interpreted as an attempt to formalize the role that donors and foreign experts in developing countries play as catalytic agents for change. Thus, concessional loans are granted to developing countries in exchange for ‘conditionalities’ that have to be met. Inevitably, such conditionalities have meant a demonstrated commitment to a reduced level of government intervention in the economy. They have also included institutional and administrative reform as part of the conditionalities. Despite the long-standing relationship with the World Bank and frequent contact with the IMF, the general verdict is that a donor-driven policy reform agenda has had modest success in South Asia. This is consistent with the view of critics who – drawing on the experience of SAL in other parts of the world – argue that a SALtype approach has been quite modest in terms of influencing long-term economic growth as governments have worked out ingenious strategies for neutralizing or diluting the policy reform agenda of donors (Mosley et al. 1991). The implication is that external actors face inherent limits when they take on the ambitious task of using financial leverage for shaping economic changes in sovereign nations. It can work in some cases, as it apparently did in parts of East Asia. External actors seem to be particularly productive in the more general area of advocacy of new ideas in policy management and institutional reform. Ultimately, the conviction and commitment of the national leadership crucially matters. Such convictions and commitments are partly a response to paradigm shifts in the domain of development policy that typically occur under the tutelage of international organizations; they are also a recognition of the long-term problems created by dirigisme. One of the long-term problems of dirigisme that is sowing the seeds of change is a continuing ‘fiscal crisis’. This view is clearly seen in the work of Lal (see Lal and Wolf 1986; Lal and Myint 1995; Lal 1987, 1989, 1995). It can also be detected in the work of Fishlow (1990) on Latin America and Krueger (1993b), although the latter is couched in a more general framework. The thesis of the fiscal crisis may be briefly summarized as follows. Once an initial policy choice in favour of dirigisme is made, it creates a group of beneficiaries who in turn supports further state control and deregulation thus ‘. . . politically reinforcing initial policy choices’ (Krueger 1993a: 352). Over time, the vicious combination of entrenchment of politically-determined benefits to favoured groups, the consolidation of an informal economy (or ‘black economy’) that emerges in response to pervasive regulation and slow economic growth erode the government’s revenue base in the face of inflexible expenditure commitments. This creates a fiscal crisis. Governments try to cope with them through a combination of the inflation tax, and internal and external borrowing. Such attempts are

16

Introduction

usually reflected in more acute BOP and political crises. The response generates ‘reform cycles’. An initial effort to cope with an impending crisis typically occurs with a package of stabilization-cum-liberalization policies; once the crisis is over, there is a tendency to revert to politics as usual. However, because the underlying economic performance does not improve on a sustainable basis and because the political forces retarding change in a dirigiste regime remain largely intact, the fiscal crisis re-emerges to generate yet another announced (but unsustainable) reform programme. One can detect features of the reform cycle in South Asia. One only has to recall short-lived episodes of liberalization in the 1960s and 1970s and modest progress in the 1980s in implementing donor-driven initiatives. Whether the economies of the region will break out of these oscillations between reform and retrenchment into a sustained phase of radically changed policies is a central question that remains unanswered even after substantial efforts and major reforms that have advanced since the early 1990s.

Objectives This second edition takes the view – articulated at some length in the final chapter – that the promise lies in moving away from policy reform per se to the more challenging task of implementing institutional reform that will invigorate the capability of the political leadership to bring about rapid, sustained and poverty-reducing growth in South Asia. The major objective and the theme of this second edition can be captured by the following observations. The central task is to re-direct the focus of governments in South Asia in order to ensure that the core functions of the state (as mentioned in the Preface) are efficiently provided. At the same time, further reform agenda for the 2000s and beyond must be sensitive to the goal of ensuring that durable democratic institutions and sustainability in newly found information economy are preserved. This is a fundamental challenge, but one that must be met in order to secure the emergence of a prosperous South Asia in the twenty-first century.

South Asian nations and a brief political history South Asian nations are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The major religions in South Asia are Hinduism, Buddhism and Islam. The region is packed with people with numerous ethnic backgrounds. Class and caste are ancient problems in South Asia (see Uppal 1977: 120–51). There are problems of occasional religious intolerance in two fronts: Hindu-dominated India and Muslim-dominated Pakistan and Bangladesh. However, at present, these are not as acute as they were in the past except in India. Since 11 September 2001 this region has changed drastically due to several terrorist attacks carried out in India and Bangladesh. Pakistan has been seen as the home of terrorism and has been the victim of major attacks in recent years with the assassination of its leader Ms Benazir Bhutto in 2008. In Sri Lanka the civil war over the last 25 years reached

South Asian economic development

17

a climax, having government forces taking over territories captured earlier by the separatist Tamil Tigers. In the next section, a brief political profile of the four countries is presented and some of their unique features are highlighted. The major sources of information presented in the next section are daily newspapers of individual countries and weekly publications such as Asiaweek, The Economist and so on. Bangladesh Bangladesh currently has more than 150 million people compared to 75 million at the time of its independence in 1971. During the last 35 years, the population has increased by almost 2 million a year. Bangladesh’s overwhelming problem is control of population. This vast population has created all sorts of problems for Bangladesh on all fronts: economic, political and/or social. Almost 70 per cent of the total population lives in 100,000 villages. More than half of them have no land resources to earn income and they are considered as landless. For this huge number of people, the main sources of income are daily wage labour in agriculture and occasional off-farm works. These workers are the people who are the main victims of underdevelopment, including malnutrition, food poverty, illiteracy, a high rate of child mortality, poor housing, poor health, poor sanitation and low life expectancy. At least 60 million people of rural Bangladesh suffer from acute problems of underdevelopment. By any standard, this is a huge developmental task for the country. Bangladesh’s political atmosphere since 1974 (following a devastating famine which has killed almost 2 million people) did not help to take any meaningful step towards solving the problems of development, except making some ad hoc move by the government of the day through donors’ involvement and also participation of some non-governmental organizations (NGOs) of both domestic and foreign origins. Political instability began with the assassination of Bangladesh’s architect and creator, Sheikh Mujibur Rahman, by some disgruntled mid-level army officers in August 1975. After this incident, a series of military coups and counter-coups threw the country into a major political crisis which still prevails, although some progress has been made on the democracy front since 1991 (Hossain 2009). In early 2009, Bangladesh again had its democratic government in place, led by Sheikh Hasina as Prime Minister for the second time in the last 17 years. It followed a caretaker government, backed by the military, which ruled the nation in 2007 and 2008. India The profile of pre-1990 India has been summarized by Sen (1990) in the following manner: India’s reputation as a land of riches is as ancient as the history of its poverty. The mixed reputation has changed in recent centuries, and India is seen these days primarily as a land of poverty, famines, diseases, squalor, caste,

18

Introduction untouchability, separatism and chaos. This reputation is not altogether undeserved. (Sen 1990: 7)

Is modern day India as pessimistic as Sen, a world famous Indian-born economist and Nobel laureate in economics, sees it? Who is to blame Sen? The 60 years of independence brought India a good deal of reputation worldwide. These include the world’s largest democracy, second largest populace nation, third largest economy (GDP in PPP terms) and, last but not least, the largest movie maker (Hollywood being the second largest). Such reputation was offset by tragic images of human indignity, poverty and sufferings until the beginning of the new millennium. Today’s India has 30 per cent (almost 300 million) of its people living in abject poverty compared to more than 40 per cent in the 1990s. By all means, this is a major breakthrough after a long and sustained period of low growth and high poverty. However, 300 million in abject poverty in the twenty-first century is indeed a very high number by any standard. Politically, India has shown great stability since independence in 1947. India has had a Westminster style of government since independence. The Indian Congress party, which brought independence from the British, has ruled for all but about 15 years. Out of Congress’s more than 40 years in government, Nehru, India’s hero for independence, his daughter, Indira Gandhi, and his grandson, Rajiv Gandhi, ruled the country as Prime Minister for more than 35 years. This party once again led a coalition government between 2004 and 2009 under the premiership of a former World Bank official, Dr Manmohan Singh, who initiated the economic reform process in the 1980s and early 1990s as the then finance minster of India. In the general election held in May 2009, the government of Dr Manmohan Singh returned. It will govern India for another five years, until 2014. Pakistan The word ‘Pakistan’ first surfaced in the later part of the British rule of the Indian sub-continent. Poet-philosopher Muhammad Iqbal articulated the concept in 1931 when he proposed a separate state for Muslim majority provinces in northwestern India. The word ‘Pakistan’ was borrowed later on by the All India Muslim League to name the new nation of Pakistan. It emerged as an independent state in 1947, without satisfying the wish of Iqbal but within the framework of Jinnah and his followers. Pakistan was formed in two wings, east and west, separated by a hostile independent India for almost 1,000 miles. Ultimately, the east wing (now Bangladesh) was separated for good in 1971 after a bloody civil war. The west wing finally became Pakistan, the geographical location of which has partly satisfied the dream of poet Iqbal. Pakistan has a turbulent political history which has continued to the present. The first casualty of political assassination in Pakistan was former Prime Minister Liaqat Ali Khan in 1952. In 1956, it proclaimed an Islamic Republic. Under chaotic civilian governments in the centre as well as in the east and west wings over 1956–58,

South Asian economic development

19

the military intervened in the central government and took power in 1958. General Ayub Khan proclaimed martial law throughout Pakistan and ruled until 1969, when he was deposed by General Yahya Khan during a civil disobedience movement. General Yahya promised to hold a general election immediately after assuming power. He kept his promise. A general election was held in 1970. In the Parliament of Pakistan, 56 per cent of the Member of Parliaments (MPs) came from the east wing and the rest came from the west wing. All of the east wing’s members were won from the east wing by the Awami League under the leadership of Sheikh Mujibur Rahman. In the west wing Zulfikar Ali Bhutto’s Pakistan People’s Party won all members. However, in an absolute sense, the Awami League was elected as the majority party in the 300-member Parliament with 56 per cent of members. General Yahya declined to relinquish power to the majority party (in this case the Awami League) and Bhutto declined to sit in the opposition. This resulted in the deadlock of the 1970 general election results. The people of the east wing demanded that General Yahya keep his promise to transfer power to the hands of the elected government. The demand was denied. Instead Yahya’s military attacked the civil and security (police and para-military) installations in Dhaka to quell the civil unrest on the night of 25 March 1971. The independence of Bangladesh was declared on 26 March 1971 on behalf of the east wing’s leader Sheikh Mujibur Rahman, who was arrested and taken to the prison in Rawalpindi on the night of 25 March 1971. A civil war broke out in Pakistan and finally, with military intervention from India, Bangladesh gained liberation from Pakistan. Pakistan’s 93,000 troops surrendered to the joint forces of Bangladesh and India in Dhaka on 16 December 1971. After the civil war, Bhutto assumed power in the new Pakistan within the boundary of former West Pakistan. General Zia-ul-Haq deposed Bhutto in July 1977 and tried him for a political murder instigated by Bhutto. He was hanged in 1979. General Zia-ul-Haq was killed in a mysterious air crash in August 1988 after ruling Pakistan for almost a decade. Bhutto’s daughter, Benazir, became Prime Minister in 1988 but was dismissed by the President on a corruption count in 1990. Newaz Sharif was voted to the power in the next election but was also dismissed by the President in 1993 due to charges of electoral fraud and massive corruption. The Supreme Court restored the government of Newaz, but he resigned. In the 1993 election, Benazir was swept back into power and was Prime Minister of Pakistan until November 1996, when she was sacked by the President on corruption and incompetency grounds. A general election was held in February 1997 and was won by the Muslim League headed by Newaz Sharif, who once again became Prime Minister of Pakistan. In 2000, Pakistan reverted back to military rule by General Parvez Musharraf, who ruled until a general election in 2008, when he was thrown out of power. The Pakistan People’s Party (PPP) of the late Benazir Bhutto won the election and her husband, Asif Ali Zardari, became President (for five years). Since early 2009, President Zardari has become embroiled in a deadly tribal war against Taliban insurgents in Swat Valley, the north-western province of Pakistan.

20

Introduction

Sri Lanka The Sri Lankan political profile, since its independence from the British on 4 February 1948, is a mixed bag of stability and political adventurism. Among the four countries of this study, it is Sri Lanka which the British left in a sound state in both economic and political terms. Being an island-state, Sri Lanka – the British called it Ceylon – was a jewel in the British Indian crown. Sri Lanka was a home of scenic beauty and paradise in the Indian ocean. In modern days, however, the paradise is lost due to political adventurism by Sri Lankans. Over the last 25 years, the country has become a land of separatism and ethnic violence. D. S. Senanayake was the first Prime Minister of Ceylon. After gaining independence, Senanayake ruled the country until 1953. Solomon Bandaranaike formed a strong government in 1956 after a short transition period between 1953 and 1956. However, he was assassinated by a Buddhist monk because of a religious disagreement in 1959. The country was then led by Srimavo Bandaranaike, the wife of Solomon Bandaranaike, until 1965. From 1965 to 1970 the country was governed by Dadley Senanayake, the son of the first Prime Minister. Srimavo regained power in 1970 and renamed the country the Republic of Sri Lanka – an expression with an ancient connotation – in May 1972. The long reign of Srimavo came to an end in 1977 when she lost the general election to a veteran campaigner of Sri Lankan politics, J. R. Jayewardene. Jayewardene replaced the 1972 Constitution and assumed power as Executive President of the country. During Jayewardene’s regime, the Tamil separatist movement erupted in northern and eastern provinces in 1983. Ranasinghe Premadasa, the former Prime Minister under Jayewrdene’s regime, was elected President in late 1988. In the meantime, the Tamil insurgency movement intensified in the northern and eastern provinces. There was an attempt by India in 1987 to mediate the Tamil conflict. India sent its troops in northern Jaffna to put down the Tamil uprising. Indian forces were withdrawn in early 1990 after the assassination of Rajiv Gandhi of India was linked to the Sri Lankan Tamil connection. The fighting between Tamil separatists and the security forces, including the army, reached a climax in mid-1991. Since 1992, military engagements have been withdrawn by both sides and attempts are being made to reach a peaceful political solution. The country was put into a great crisis again on May Day in 1993 when a suicide bomber killed President Premadasa in an election rally. In the 1994 election, Chandrika Bandaranaike Kumaranatunga, the younger daughter of Solomon and Srimavo Bandaranaike, swept into power. Chandrika assumed the position of President and made her mother Srimavo Prime Minister. Under the present constitution, the President is both head of state and head of government. Sri Lanka, despite fighting a civil war for the last quarter of a century, has enjoyed democratically elected governments over the last 60 years, unlike Pakistan and Bangladesh. In June 2009, the Sri Lankan government finally won the 26-year civil war against Tamil Tigers. The separatist movement by the Tamil minority comes to a halt with the Tigers completely eliminated by the Sri Lankan army from their last stronghold.

South Asian economic development

21

A brief summary of the political history of the four countries since their independence suggests one common feature. In all four countries, since independence, the government was changed through military intervention or political assassination at least once. This problem, in particular, destabilized the various governments in Pakistan and Bangladesh several times until the presently democratically elected governments came into place in both countries. India and Sri Lanka have enjoyed relative calm and stability in government, except both countries suffer from an acute problem of terrorism, regional insurgency and separatist movements. The other common feature of South Asia is poverty. As can be seen in Part II, substantial progress has been made on the poverty and Millennium Development Goals (MDGs) fronts over the last two decades. However, this progress has been reversed in the last two years due to the global food and fuel price crisis and global economic slowdown, the like of which has not been seen since the Great Depression in the 1930s, observed by a recent UN study. Over the last two years, the number of people in poverty has increased by 100 million in South Asia, and the total number of people in poverty has once again reached 400 million. This figure is the region’s highest in four decades. The UN further observes that presently three-quarters of the region’s population survive on less than $2 a day (Bonnerjee 2009). Indeed, this is quite alarming considering that almost all the nations in the region have had so much success in the last two decades.

Readers’ guide This study spans 15 chapters that are grouped into three broad clusters or parts. Part I contains four chapters, including this introductory chapter, which also includes a synoptic political history of the economies under study. There are also three empirically-driven chapters that review various aspects of economic growth, human development and demographic dynamics, primarily over the last two decades. The range of performance indicators for South Asia is linked with Southeast and East Asian benchmarks. Part II forms the bulk of this book. It encompasses nine chapters that cover a diverse range of key themes in South Asian economic development. The chapters cover human resources, labour market institutions, the MDGs, macroeconomic management, economic reform, trade liberalization, privatization and deregulation, direct foreign investment, regional integration, agriculture and rural development, climate change, poverty alleviation and information technology issues. The chapters highlight both achievements and deficiencies. Moreover, each chapter provides an introduction to the major debates. The issues are discussed in the context of received theories, including a critical assessment of them. Part III considers two topics: whether there are replicable lessons of success, focusing on the experience of mobile phones in India (Chapter 14), and an agenda on good governance for managing growth in South Asia in the era of the information revolution (Chapter 15). The emphasis is on identifying principles of good governance that transcend the geographical, historical and cultural boundaries of South Asia.

2

Benchmarking South Asian economic performance

The 1990s were characterized by increased growth in South Asian countries compared to the growth experienced in the 1980s. However, not all the nations in the region experienced uniform growth. The growth in India was phenomenal due to the economic reforms brought to this nation since the early part of the 1990s. In this chapter an attempt has been made to capture the overall economic performance of the four countries of the South Asian region. A comparative analysis of the four nations under study (Bangladesh, India, Pakistan and Sri Lanka) will be carried out with that of the four nations of Southeast Asia (Malaysia, Thailand, Philippines and Vietnam) in terms of economic factors such as growth rate, savings, investment, exports and imports over the 1990s. This analysis will at least partly help to answer the frequently asked question in the literature: Is South Asia catching up Southeast Asia? South Asia made a major breakthrough on the economic development front in the 1990s and early 2000s. In the analysis below, the economic performances between the period 1996 and 2006 as well as prospects for the future are emphasized.

An overview of economic performance With the help of Tables 2.1 to 2.9 the overall performances of the economic indicators in South and Southeast Asia have been captured. Growth performance Table 2.1 presents the information from the selected Asian countries on comparative sectoral (agricultural, industrial and service) and overall growth performance in the period 1991–2005. In recent years, on average annually, India grew almost 8 per cent (2000–05). Sri Lanka and Bangladesh grew moderately, 5.3 and 5.4 per cent respectively, whereas Pakistan’s rate was below 5 per cent (4.8 per cent). The political chaos and the terrorist threats over the period of the last ten years were behind the low growth in Pakistan. During the same period, the growth rate in Vietnam was 7.5 per cent. This is the fastest-growing nation in Southeast Asia. This nation was not hit by the currency crisis of 1997. The crisis-hit countries, however, grew moderately after 1997. For instance, Table 2.1 suggests that Malaysia’s rate of growth was 4.8 per cent, Thailand’s 5.4 per cent and the Philippines’ 4.7 per

4.3 3.9 5.5 5.2 8.3 2.1 7.9 5.6

4.7 6.8 6.1 3.8 8.8 3.9 6.7 7.2

5.4 7.7 4.8 5.3 4.8 4.7 5.4 7.5

4.0 7.7 5.2 4.4 3.3 3.2 3.6 7.2

2.1 2.2 3.7 2.3 2.1 1.8 3.5 3.3

1991–94 –1.9 3.7 6.7 –0.9 1.6 2.3 3.1 4.2

1995–96

Per capita Agriculture

2000–05

2004–05

1995–96

GDP growth

1991–94 2.5 2.5 2.3 0.7 3.4 3.9 1.9 3.8

2000–05

Industry

6.8 4.9 6.8 6.4 10.1 1.0 11.8 5.8

1991–94 5.7 8.7 6.0 6.2 10.9 3.8 8.2 10.8

1995–96

7.3 7.5 3.8 3.3 4.6 3.3 6.9 10.2

2000–05

Service

— — — — 7.5 3.4 8.9 8.1

1991–94

4.5 8.0 4.4 5.7 4.5 4.7 1.6 6.2

1995–96

Sources: ARIC (Asia Regional Information Center) (2004) at http://devdata.worldbank.org/hnpstats; Hossain, Islam and Kibria (1999); World Bank (2007)

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Country

Table 2.1 Sectoral growth rates 1991–94 and 2004–05 (%)

5.6 8.5 5.4 5.8 6.2 6.0 6.0 6.9

2000–05

24

Introduction

Table 2.2 Sectoral share of GDP 1990–2005 (%) Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Agriculture

Industry

Services

1990

1996

2005

1990

1996

2005

1990

1996

2005

30 31 26 26 15 22 13 39

31.9 26.1 24.8 19.1 12.2 15.5 12.2 25.8

20 18 22 17 9 14 10 21

22 28 25 26 42 35 37 23

19.7 31.7 26.4 32.1 46.9 31.5 43.0 32.5

27 27 25 26 52 32 44 41

29 41 49 48 43 44 50 39

48.4 42.2 48.7 48.7 49.0 51.6 49.6 41.7

49 54 53 57 40 53 46 38

Sources: ARIC (Asia Regional Information Center) (2004) at http://aric.adb.org; World Bank (2007); Hossain, Islam and Kibria (1999)

cent during 2000–05. All the South Asian nations grew strongly until 2005 compared to the rate of growth a decade earlier. However, this is not true for the countries in Southeast Asia. In terms of per capita growth rate between the countries of these regions in 2004–05 (keeping population growth rate in mind), India and Vietnam have been experiencing the highest rate (above 7 per cent). The lowest rates, however, were experienced by Malaysia and the Philippines (below 3.5 per cent). Table 2.2 provides information on the sectoral share of GDP in two regions of Asia, taking three periods into considerations: 1990, 1996 and 2005. The information highlights further structural changes which have occurred in these economies over the last ten years. In 1996, agriculture’s contribution to GDP was very high in Bangladesh and Vietnam, while contribution in India and Pakistan was modest. In Sri Lanka, Malaysia, Thailand and the Philippines the share was below 20 per cent. This structure has dramatically changed in 2005 for Bangladesh (20 per cent), India (18 per cent) and Vietnam (21 per cent). Between 1990 and 2005, the industry sector’s contribution to GDP has increased in every nation. Bangladesh’s increase has been by 5 per cent, Malaysia’s by 10 per cent, Thailand by 7 per cent and Vietnam by 19 per cent. In India, Pakistan and Sri Lanka the share remains unchanged. The services sector’s share of GDP has not changed dramatically in the Southeast Asia region over 1990–2005 except in the Philippines, which registered a major improvement. The services sector’s contribution to GDP in the Philippines increased from 43.5 per cent in 1990 to 53 per cent in 2005. This contribution declined in Malaysia (by 3 per cent) and Thailand (by 4 per cent) over this period. The South Asian services sector experienced an extraordinary expansion over the period between 1990 and 2005. Bangladesh expanded by 20 per cent, India by 13 per cent, Pakistan by 4 per cent and Sri Lanka by 9 per cent.

Domestic savings and investment Table 2.3 provides comparable information on saving and investment ratios as a percentage of GDP of the countries of South and Southeast Asia over 1990 and

Benchmarking South Asian economic performance

25

Table 2.3 Domestic savings and investment ratios (% of GDP) Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Gross domestic saving

Gross domestic investment

1990

2005

1990

2005

29 22 22 17 30 20 33 –2

31 32 18 20 36 31 29 34

17 24 19 23 32 24 41 13

25 33 17 26 20 15 32 35

Source: World Bank (2007)

2005. All the South Asian nations experienced growth in domestic saving and investment except Pakistan. In Southeast Asia, all the nations experienced improvement in saving except Thailand. In terms of domestic investment, all the nations except Vietnam experienced decline over this period. These figures further demonstrate that the countries hit by financial crisis in 1997 have not fully recovered with respect to domestic saving and investment. They also remained low until 2005 compared to the performance in the pre-crisis period.

Export growth and expansion Export growth and expansions are necessary conditions for achieving a high rate of economic growth in any country. Over the last 30 years, the Southeast Asian economies experienced strong growth in exports. Table 2.4 presents South and Southeast Asian performance with external trading over 1990 and 2005. South Asia’s country-specific analysis suggests that among the four countries studied, in 1990–2000, all the countries except Pakistan showed strong growth in Table 2.4 External trade annual change (%) Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Exports

Imports

1990–2000

2000–05

1990–2000

2000–05

13.1 11 1.7 14.2 12 7.8 9.5 24.1

8.3 15.4 1.6 9.1 6.1 5.4 6.6 16.6

9.7 12.8 2.5 8.8 10.3 7.8 4.6 28.2

5.6 18.4 7.1 4.5 6.8 6.2 8.8 19.9

Sources: ARIC (Asia Regional Information Center) (2004) at http://aric.adb.org; World Bank (2007)

26

Introduction

Table 2.5 Current account 1990–2005 (balance of payment in million US$) Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Current account balance

Total reserves

1990

2005

1990

2004

— –7,036 –1,661 –298 –870 –2,695 –7,281 —

167 6,853 –3,463 –647 19,980 2,338 –3,670 217

— 5,637 1,046 447 10,659 2,036 14,258 —

1,178 137,825 11,109 2,736 70,450 18,474 52,076 9,051

Source: World Bank (2007)

exports. In contrast, in 2000–05, the export growth declined in Bangladesh and Sri Lanka. In India and Pakistan exports have been increasing. In Southeast Asia exports declined in all the nations in 2000–05. Malaysia’s exports have declined by almost half in 2000–05. These results show again that the nations hit by financial crisis were the worst performers during the last decade. The import growth in recent years has also remained subdued in all the countries except Thailand. In the South Asia region, imports have increased in all nations except Bangladesh and Sri Lanka. Table 2.5 provides information about the expansion and contraction in merchandise trade over the 15-year period between 1990 and 2005. Over this period, current account in the BOP in India improved significantly. In 1990, all the nations were in deficit. This deficit was converted into surpluses by India and Bangladesh in 2005, while Sri Lanka and Pakistan remained in deficit. The current account deficit worsened for both these nations in 2005 compared to 1990. In Southeast Asia, all the countries were in deficit in 1990. However, Malaysia’s improvement in current account up to 2005 was phenomenal. The Philippines and Vietnam also improved significantly, while Thailand remained in deficit in 2005. Table 2.5 further suggests that foreign reserves have improved for all the nations in both regions up to 2005. The reserves for India stood at $138 billion, while Malaysian reserves hit $70 billion and Thai reserves were more than $50 billion. All these nations certainly made major breakthroughs in accumulating foreign reserves over 1990 and 2005. In recent years, these figures jumped even further. Indeed, India, Malaysia and Thailand crossed a major milestone in recent years as far as the foreign reserve is concerned.

Integration with the global economy It is now well established that, in recent years, the development aid attracted by both South and Southeast Asia has been negligible. The source of major external funds was through foreign direct investment (FDI) and integration of these economies with global trade. For example, one of the most important indicators

Benchmarking South Asian economic performance

27

Table 2.6 Integration with the global economy Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Merchandise trade (% of GDP)

Trade in services (% of GDP)

Net Foreign Direct Investment (% of GDP, net inflows)

1990

2005

1990

2005

1990

2005

17.6 13.1 32.6 57.3 133.4 47.8 65.7 79.7

38.5 28.5 37.3 64.7 196.1 89.5 129.3 129.9

3.6 3.4 8.8 13.4 21.2 11.3 14.9 —

5.7 8.2 10.1 15.5 31.9 10.4 27.3 18

— 1 0.6 –0.2 5.3 1.2 2.6 2.8

1 1.8 2 8.4 3 1.1 0.2 3.7

Source: World Bank (2007)

for this was accumulation of foreign reserves over the last 15 years as presented earlier by almost all the nations under study. Table 2.6 presents some information about integration of all the economies with global trade in terms of improvement in merchandise trade, trade in services and attracting net foreign direct investment over 1990 and 2005. Merchandise trade and trade with the services sector over 1990 and 2005, as a percentage of GDP, improved for all the nations. Net FDI growth has been very strong for Sri Lanka. Almost 8.5 per cent of its GDP in 2005 was net foreign direct investment. The figures for Malaysia and Thailand were disappointing since net FDI declined for these nations in the post-currency crisis period. Indebtedness External indebtedness is one of the major indicators of a country’s performance in economic development and indicates the direction the economy is heading in the future. Over the last 15 years, in South Asia, the burden of external debt from various bilateral and multilateral sources has been declining. This has worsened in Southeast Asia. The sources of major multilateral debt are the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank. To measure the consequences of external debt and its future trend in an economy, three major indicators are generally used. These are: external debt as a percentage of GDP, external debt as a percentage of exports and debt–service ratio. Debt– service ratio is an expression of total debt service (interest and part payment of the principal) as a percentage of exports. Table 2.7 presents this information for all the nations studied. By any standard, these figures are a matter of concern for Pakistan, the Philippines and Thailand. The rest of the nations demonstrate a comfortable zone in recent years (less than 5 per cent). In Table 2.8, a comparison has been made between South and Southeast Asian countries in their outstanding debt as a percentage of gross national income (GNI) and their debt–service ratio from export dollars in 2005. The debt–service ratio

28

Introduction

Table 2.7 External indebtedness 1990–2005 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Total external debt ($ml)

External debt as % of GNI

Debt service as % of exports of goods and services

1990

2005

1990

2005

1990

2005

12,439 83,628 20,663 5,863 15,328 30,580 28,094 23,270

18,935 123,123 33,675 1,444 50,981 61,527 52,266 19,287

2.4 2.6 4.6 4.9 10.3 8.2 6.3 2.9

1.3 3.0 2.3 1.9 7.6 9.2 11.3 1.9

25.8 31.9 21.3 13.8 12.6 27 16.9 —

5.4 — 10.2 4.5 5.6 16.7 14.6 2.6

Source: World Bank (2007)

Table 2.8 Outstanding debt 2005 Country

Outstanding debt (% of GNI)

Debt service (% of exports of goods, services and income)

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

22 16 30 48 46 67 32 38

102 73 134 109 35 120 44 56

Source: World Bank (2007)

figures, once again, suggest that Bangladesh, Pakistan, Sri Lanka and the Philippines were unable to service debts from their exports-only income.

Major indicators of macroeconomic balance Three major macroeconomic indicators and their performances in recent years will be analysed in the conclusion of this chapter. These indicators are: the fiscal balance, movements in the exchange rate under a more flexible regime and the inflation rate. The estimates on fiscal deficit show how healthy the economy is in terms of lending and borrowing. The exchange rate figures show whether the rate is behaving in such manner that it will not be detrimental to the export-led policies of the government. The inflation rate shows the economy’s stability in terms of aggregate demand during a high-growth period. With respect to the above macroeconomic indicators, Table 2.9 provides a mixed picture during the period of 1990–2005. In all countries except Thailand, the fiscal balance worsened. In Sri Lanka and Malaysia, the deficit has been very

Benchmarking South Asian economic performance

29

Table 2.9 Major macroeconomic indicators 1990–2006 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Fiscal deficit/surplus (% of GDP)

Exchange rate (units per US$)

Inflation (% per year)

1995

2005

2005

2006

1990–2000 2000–05

— –2.2 –5.3 –7.6 2.4 –0.8 — —

–0.7 –3.6 –3.2 –7.3 –4.3 –3.0 2.5 —

64.33 44.10 59.51 100.50 3.79 55.09 40.22 15,850.0

68.93 45.3 60.27 103.91 3.63 51.31 37.88 15,921

5.5 13.7 9.7 9.9 3.6 7.7 4.9 4.1

5.6 8.9 4.9 9.2 1.6 5.0 2.1 4.5

Source: World Bank (2007)

high allowing a comfort zone at 5 per cent of GDP. Sri Lanka’s deficit has been running at an alarming level (more than 5 per cent of GDP). This is mainly due to this country engaging in a civil war over the last 30 years. The currencies of all countries except Malaysia, the Philippines and Thailand have experienced further depreciation in terms of a year to year fluctuation over 2005–06. Among these nations, Malaysia has been practising a fixed exchange rate regime, pegging its currency against the US$ since 1997 (the year of the currency crisis). Inflation declined in all nations except Vietnam over 1990 and 2005. However, in recent years, due to current oil shock, the prices of food products have gone through the roof in all the nations. It remains to be seen how severely the oil shock impacts the overall inflation of the nations studied in the years to come. From the above analysis, it appears that all the countries studied, except Vietnam, are presently in a position to overcome the problem of economic underperformance which they have been experiencing since 1997. Vietnam, however, was not hit by the currency crisis of 1997 and has been performing steadily over the last 12 years. One must be cautious about the future developments in macroeconomic terms of these regions since the present global economic slowdown has the capacity to wipe out almost all the gains achieved over the last decade or two. It is now clear that the global economic slowdown will hit South Asia soon and will last for at least the next two years (until 2011). The way things are unfolding in the major trading partners of South Asian nations (mainly with garments) and the retreat of migrant workers (from the Middle East and Malaysia), could turn into full-blown economic turmoil if the nations fail to prepare for the rough road ahead. It is clear by now that the region has gained economic growth in the latter part of the twentieth century against all odds (e.g. corruption, administrative inefficiency and overpopulation). The fear, though, is that the region has less exposure and credibility in managing financial crisis of a global nature. Thus, one must take a long and hard look at those countries that have managed such a crisis before, even if the crisis was not global in nature. In this regard, the Southeast and East Asian financial crisis of 1997 immediately comes to mind. ‘Bailout’ is a popular term all over the globe nowadays, although it is not new. In

30

Introduction

this part of the world, bailing out nations from financial turmoil was witnessed first when the IMF and other friendly developed nations bailed Thailand, Korea and Indonesia out from the crisis of 1997. Contrary to this, it was observed that Malaysia was also a crisis-hit nation that refused to be bailed out by the IMF in 1997. The condition in 2008 and 2009 is somewhat different. This time the crisis began with the US and other OECD nations, thus no IMF is available to bail them out. Plus, in the case of Southeast and East Asia, the amount of bailout money needed was in the billions, and now it is in trillions, at least in the cases of the US and the EU. The bailout waves have hit South Asia as well. Some apex business bodies in the region are requesting the governments to bail them out from the present crisis with millions and billions of dollars. It appears that the business of bailout by the state is certainly not clear to the ordinary readers and students. In simple words, as they say, under the bailout plans, the incumbent government wants to support big businesses with the tax payers’ money, or from borrowing it, so that these businesses do not go broke and the workers can be kept on the payroll until a recovery is in sight. Nations such as the US, Japan and EU countries have bailed out private businesses in recent months. What awaits South Asia? This is certainly going to be the key question needing to be answered by the policies of respective governments in this respect in the near future. Bailout or not, the present task is to keep the economy from bleeding from the great recession. For example, for a nation like Bangladesh, with the lowest credit rating and poor foreign reserves, the prospect of a bailout is very limited without indulging in printing money. It all depends on how hard the economy lands over the next two years and how the multilateral donors behave during the time of crisis for the nations such as Bangladesh. For the nations, rich or poor, at the end of the day, the major issue is recovering with minimum damage inflicted to the economy and recovering within the shortest possible time. In this regard, the recovery in East Asia, particularly Korea, has been spectacular between 1997 and 1999, with a bailout support by the IMF. In contrast, Malaysia’s recovery in Southeast Asia from the Asian currency crisis, if not spectacular, was certainly remarkable without any support from the IMF or others. One should keep in mind here that the IMF support for Korea came in 1997 against some stringent conditions imposed by the IMF. The then government of Dr Mahathir Mohammad, however, refused to accept such support for Malaysia. In the end, both Korea and Malaysia recovered, although Malaysia’s recovery was slower by a few years. It is clear that by 2005, both Korea and Malaysia recovered. They have been growing again. Both the economies hit an almost 5 per cent growth level in 2003 and the inflation was brought down to below 3 per cent in 2005. During the crisis period (1997–99), both the countries were in deep recession. They, however, recovered from serious unemployment problems, which hit double digits during the crisis period, in early 2000. It must be emphasized, once again, that for the recovery, the nations in question adopted contrasting policies. One can learn several lessons from both the experiences presented above. At this stage, the most important issue for South Asia is to prepare for the worst and also get the people fully informed on the likely consequences before the crisis hits hard.

3

Benchmarking South Asia’s human development in the era of ICT

Human development as a development effort in South and Southeast Asia has been the most remarkable experience witnessed by both multilateral donors and by the NGO movement over the last three decades. Alongside economic growth, human development in the developing society has been emphasized by the United Nations Development Programme (UNDP)’s annual Human Development Reports since 1990. The major areas covered for human development estimate are: education, health, environment, personal security, community participation, political freedom and cultural identity for human well-being. The reasons for separating these areas from the core economic agenda of developing nations were simple: to make the process of development a complete well-being process of the society, and to make the quality and distribution of income growth an important ingredient of the economic growth process. The objective of this chapter is to demonstrate South and Southeast Asia’s condition in 2006 in human development compared to its condition in the 1990s.

Overall changes in selected social indicators So far the population statistics of the nations studied have indicated that remarkable improvements have occurred in demographic conditions over the last 30 years. In Table 3.1, a comparison has been made by country to show differences in various social indicators over the period between 1995 and 2006. The longevity indicator in all eight nations shows an improving trend over this period. Bangladesh’s average life expectancy over the last ten years has increased by more than seven years. Life expectancy in the rest of the South Asian nations, except Sri Lanka, increased by almost three years. Sri Lanka’s life expectancy declined. The Philippines’ life expectancy increased by six years and Malaysia’s life expectancy increased by three years. In Thailand, this increase has been marginal, while Vietnam shows an increase of six years. Infant mortality and fertility rates are in decline in all eight nations. However, in Bangladesh, the fertility rate remains constant. The rate of decline in Southeast Asia is more prominent in the Philippines, Vietnam and Thailand. The rest of the nations have been experiencing a very low rate since 1995. Primary school completion rates have been showing improvement in all the countries except India and adult literacy ratios have been signalling improvement in all the nations over 1995 and 2006.

32

Introduction

Table 3.1 Major social indicators 1995–2006 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Life expectancy at birth, total (years)

Infant mortality rate (per 1,000 live births)

Total fertility rate (birth per women)

Primary school completion rate (%)

1995

2006

1995

2006

1995

2006 1993

2005 1995 2006

56 61 62 72 71 65 69 65

63.1 63.7 64.7 71.6 74 71 71 71

81 70 92 16 16 45 34 38

73 67 76 neg. 12 33 21 19

3.2 3.2 5.2 2.1 3.8 4.3 2.2 3.6

3.2 3.1 4 2 2.7 3.2 1.9 1.8

77 89 63 — 94 97 82 94

70 98 53 105 91 86 76 90

Adult rate total (% of population ages 15+)

37 51 36 90 19 92 8 90

47.5 61 49.9 90.7 88 93 53 90

Source: World Bank (2007, 2005); UNDP (2004, 2008); Hossain, Islam and Kibria (1999)

Development performance in health and education sectors between 1994 and 2005 This section provides an overview of South and Southeast Asia’s attempts to improve conditions in the areas of health and education over the last three decades. This section, in other words, makes intra-region and inter-region comparisons on social well-being. Health Over the last 30 years, the health sector has been one of the neglected areas in Asia. Out of the total budget spending, health attracted within the range of about 4–5.5 per cent of GDP in Southeast Asian nations in 2004. The expenditure in this sector in countries in South Asia, except Sri Lanka, has declined over the last 10 years. Sri Lanka’s increase was marginal. Table 3.2 presents the basic health record in the eight countries under study. All the countries, as mentioned earlier, have increased their average life expectancy over the last 12 years, except Sri Lanka. All these countries recorded remarkable progress in life expectancy in recent years. Access to overall health services has significantly improved in all countries. Access to safe drinking water shows a significant achievement by all these nations. Recently, Bangladesh provided safe drinking water to 74 per cent of its population, India to 86 per cent, Pakistan to 91 per cent and Sri Lanka to 79 per cent. In Southeast Asia, the Philippines provide safe drinking water to 82 per cent, Thailand to 84 per cent and Vietnam to 77 per cent of its people. Malaysia’s achievement in this sector remains at almost 100 per cent due to its strong per capita growth during the last three decades.

39

48

2.5

0.61

0.60

94 44 3

2.3

111 — 0

0.9

74

83

1.4

48

40

2.6

15

10

1.23

9

27

.547

Bangladesh

1.13

3.8

105 — 0

1.3

2.5

29

63

43

9

26

.619

India

0.63

3.8

89 — 55

0.9

6

33

86

47

8

24

0.69

2.7/3.2

65/106 — 0/0

1.8/1.8

1.9/6.9

47/63

60/57

12/62

8/6

37/18

.551

Pakistan

0.43

2.3/—

68/97 21/63 67/59

0.4/2.0

7.4/5.5

59/91

91/79

28/70

7/6

26/18

.743

Sri Lanka

0.38

5.2

94 — 0

1.5

0.1

—

98

90

5

29

.811

3.8

0.1

94

99

55

5

21

0.24

8.0

95 69 347

Malaysia

0.32

2.9

96 — 0

1.5

0.1

74

87

39

6.66

32

.771

0.24

3.2

93 61 47

3.4

1.2

83

86

49

5

24

Philippines

0.52

3.5

76 — 0

0.9

0.2

79

80

72

6

21

.781

3.5

0.5

96

84

72

7

16

0.20

4.2

86 64 110

Thailand

—

—

90 — 0

0.9

0.4

29

55

20

7

29

.733

5.5

0.5

47

77

77

6

18

—

9.7

94 69 129

Vietnam

Sources: UNDP (2004); Human Development Indicators (2004) http: hdr.undp.org/reports/global/2004/pdf/hdr04_HDI.pdf; World Bank (2007, 2004), http://devdata.worldbank.org/ hnpstats/query/SMResult.asp.s

Primary enrolment ratio (1993–2005) Secondary enrolment ratio (1991–2005) Internet users (per 1,000) (1990–2005) Public expenditure on education (% of GDP) (1994–2005) Ratio of education and health expenditure, and military expenditure (% of GDP) (1990–2000)

Education

Crude birth rate (per 1,000) (1996–2005) Crude death rate (per 1,000) (1994–2005) Contraceptive prevalence rate (% of women ages 15–49) (1993 to 2000–05) Access to improved water source (%) (1995–2000) Access to improved sanitation (%) (1995–2004) Physicians (per 1,000) (1993 to 2000–05) Health expenditure (% of GDP) (1990–2004)

Health

Human Development Index (HDI) (2005)

Sector

Table 3.2 South and Southeast Asia’s Human Development Record 1990s–2000s

34

Introduction

Education Government spending in education increased in all the countries except India between 1995 and 2005. This remained constant in India during the period. The use of the internet increased in all these nations in 2005. Malaysia was the highest user among the nations of these regions over this period.

Changes in poverty and income distribution Poverty has many definitions, however, for the purpose of this section the following definition by Quibria is taken into consideration. Poverty can be defined as: the inability to achieve an acceptable living standard. Living standard may be thought of as real income, appropriately measured, after adjustments are made for goods and services produced and consumed at home, for income-in-kind, for cost of living differences and for household size and composition. (1994: 188) Using $1US per person per day as the poverty line, Table 3.3 shows that in 2005 Bangladesh had 35 per cent of its population living in poverty, India had 33.5 per cent, Pakistan had 17 per cent and Sri Lanka had 5.5 per cent. However, in recent years all these nations have experienced an increase in poverty due to an increase in the prices of food grains worldwide. In Southeast Asia, the international measure of poverty was considered at $2US per person per day since in these countries the per capita income and cost of living are higher than the South. The Philippines had 31 per cent of its population living in poverty in 2004 and Thailand had 25 per cent in 2002. The figures for Vietnam are unavailable for Table 3.3 Changing level of poverty Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

National measure: population below poverty line

International measure: $2/person/day

Year

%

Year

%

Year

%

Year

%

1996 1994 1993 1991 1989 1994 1994 1998

51 36 28.6 20 15.5 40.6 9.8 37.4

2000 2000 1999 1996 — 1997 1998 2002

49.8 28.6 32.6 25 — 36.8 13.6 28.9

2005 2005 2002 2002 1993 1994 1992 —

35* 33.5* 17* 5.6* 22.4 62.8 23.5 —

2005 2005 2002 2002 1997 2003 2002 1998

84 80 73.6 41.6 9.3 30.6 25.2 63.7

Sources: World Bank (1990, 2001, 2004, 2007); http://www.worldbank.org/data/wdi2004/pdfs/table2-5.pdf; http://www.worldbank.org/wdr/2000/pdfs/engtable4.pdf; http://www.worldbank.org/data/wdi2001/pdfs/tab2_6.pdf Note: * Figures are $1/person/day.

Benchmarking South Asia’s human development

35

Table 3.4 Income distribution and PPP estimates of GNP Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Years of survey

2005 2005 2002 2002 1997 2003 2002 2004

Percentage of share of consumption

Gini Index

lowest

lowest

second

third

fourth

highest

highest

10%

20%

20%

20%

20%

20%

10%

3.7 3.6 4.0 3.0 1.7 2.2 2.7 4.2

8.6 8.1 9.3 7.0 4.4 5.4 6.3 9.0

12.1 11.3 13.0 10.5 8.1 9.1 9.9 11.4

15.6 14.9 16.3 14.2 12.9 13.6 14.0 14.7

21 20.4 21.1 20.4 20.3 21.3 20.8 20.5

42.7 45.3 40.3 48.0 54.3 50.6 49.0 44.3

27.9 31.1 26.3 32.7 38.4 34.2 33.4 28.8

33.5 36.8 30.6 40.2 49.2 44.5 42.0 34.4

Source: World Bank (2007)

recent years. However, this nation’s improvement in growth in recent years has contributed positively to the eradication of poverty. Table 3.4 provides information about the distribution of income in the selected countries of the two regions. In the table, the percentage share of an economy’s consumption has been shown under five quintiles and the Gini ratio of each country has been shown in the last column for recent years. Consumption share of the lowest 20 per cent of the population has been very low in Malaysia, Thailand and the Philippines. Vietnam has shown a slight improvement over the rest of the nations studied. In all the countries except Vietnam, more than one-third of consumption has been enjoyed by the top 10 per cent of the population. The gini concentration ratio presents a worse distribution of income for Malaysia, followed by the Philippines, Thailand and Vietnam. This analysis suggests that Vietnam has been maintaining a relatively equitable growth in consumption in recent years, while the rest of the countries have fallen behind in maintaining the consumption share of the lower income people.

Millennium Development Goals: a tale of two Asias The MDGs were set by the international community led by the United Nations with a Millennium Declaration in 2000. In order to achieve the MDGs, the international community agreed that, for example, poverty will be halved by 2015 in developing nations, taking the 1990 level as a benchmark. On top of the goal of poverty reduction, there are seven more MDGs. Each of these goals, moreover, sets multiple targets to be achieved by 2015. Out of eight development goals, there are 18 targets to be met. The MDGs broadly include the areas covered under social and environmental goals with the partnership between developed and developing countries (World Bank 2006). In this section, an attempt is made to investigate the social goals and targets in some selected nations of Asia. The social goals cover five areas: eradicate extreme poverty, achieve universal primary education, promote gender equality, reduce child mortality and improve maternal health.

36

Introduction

Table 3.5 Eradication of extreme poverty Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Poverty (US$1 a day headcount ratio (%))

Share of consumption to poorest quintile (%)

2002

2005

2005

41.3 — 17.0 5.6 — 15.5 <2 —

35 33.6 — — — 10.5 <2 —

9.0 8.9 9.3 7.0 4.4 5.4 6.3 9.0

Source: World Bank (2006, 2007)

The cut-off date for achieving the MDGs is 2015, yet many nations are finding major difficulties in living up to the commitments they made at the time of the declaration in 2000. There are many reasons for this, however, it appears that the Southeast Asian nations are ahead of their counterparts in South Asia. The results are presented in Tables 3.5–3.7. Taking headcount ratio into consideration, it is expected that Bangladesh will bring down poverty by 20 per cent of its total population by 2015. For India it is 15 per cent and for Pakistan this is about 8 per cent of the total population. In Southeast Asia, only the Philippines had more than 10 per cent of people suffering from poverty in headcount ratio terms in 2005. By 2015, this nation must bring down poverty to a level of 5 per cent. Other nations in this region have a negligible percentage of people suffering from poverty. Unfortunately, the information for Vietnam is not available at this time. Table 3.6 presents information on the status of these countries in terms of primary education completion rate and gender equality in education. Once again, the Southeast Asian nations have been ahead of the nations in South Asia. Primary Table 3.6 Achieving universal primary education and promoting gender equality Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Primary education completion (%)

Ratio of girls to boys in primary & secondary school (%)

1991

2005

2005

49 68 — 97 91 86 — —

77 89 63 — 95 98 82 98

101 87 75 102 105 102 98 103

Source: World Bank (2006)

Benchmarking South Asia’s human development

37

Table 3.7 Reducing child mortality and improving maternal health Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Child mortality (under five mortality rate per 1,000)

Maternal mortality ratio (per 100,000 live birth)

1990

2005

2005

149 123 130 32 22 62 37 53

73 74 99 14 12 33 21 19

380 540 500 92 41 200 44 130

Source: World Bank (2006, 2007)

education completion rates have been very high in all the nations in both the regions except Bangladesh and Pakistan. However, Bangladesh and India have improved their completion rates significantly since 1991. In terms of gender ratio, all nations except Pakistan and India strongly recovered from education inequality between male and female students in 2005. Female enrolment is larger than male enrolment in all the nations except India and Pakistan. Thailand is marginally behind. In the case of child mortality and maternal mortality ratios, Table 3.7 presents figures for 2005. Once again, in terms of both the criteria, South Asia has been behind Southeast Asia. However, the South Asian nations have improved in both terms over 1990 and 2005. Maternal mortality rate is still very high in all the nations in South Asia except Sri Lanka. In Southeast Asia, this rate is relatively high in the Philippines. Given the above information, it may be emphasized that in Southeast Asia the MDGs may be achieved by 2015. It is expected, however, that South Asia will cross the line in all the goals except poverty alleviation. In recent years, in relative terms, the poverty in headcount terms has increased in all the nations of South Asia for at least three reasons: increase in food prices, increase in fuel prices and change in the food grain cultivation pattern in developed nations due to a search for green fuel out of corn, soybean and sugarcane (ethanol).

Further readings Haq M Human Development Centre (2008) Chaturvedi, S. K. et al. (2008)

4

Demographic dynamics of South Asia

It is well known that South Asia and Southeast Asia support more than one-fourth of the total population of the world. The latest figures suggest that the countries in these regions are now populated by almost two billion people. More precisely, the figure was 1.85 billion in 2005 (see Table 4.1). Demographically, therefore, they are critical and alarming regions of the world. By world standards, South Asia is characterized by very high population growth, high density and high dependency. The reasons for including this chapter in the present volume are to demonstrate the effect of the population problem in the course of the development of the countries studied. Also, it shows the severity of the population factor, which is a constraint to economic development. An attempt is made, first, to outline the general demographic situation and then to analyse the effects of population growth on economic development. Finally, a word on achieving MDGs is presented as the backdrop of the population dynamics of the region.

The demographic conditions and trends Table 4.1 shows that in 2005 the total population of all the countries studied is almost one-fourth of the world’s total. The average population growth rate for Asia Table 4.1 Demographic conditions Country

Area (in ’000 sq. km.)

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

144 3,288 796 66 330 300 514 330

Population (million)

Growth rate (%)

Rural/total population

1995

2005

2015

1990–2005

2005–15

1990

2005

120 929 130 18 20 69 58 70

153.3 1,134.4 158.1 19.1 25 83 64 83

180.1 1,302.5 190.7 20 30 99 69 92

2.2 2.0 2.8 1.1 2.3 2.0 1.1 1.5

1.6 1.4 1.9 0.4 1.5 1.7 0.7 1.0

— — — — 50.2 51.2 70.6 79.7

74.9 71.3 61.4 75.8 32.7 37.3 67.7 73.6

Sources: Human Development Indicators (2004); FAOSTAT: World Bank-World Bank (2004, 2007); http://www.infoplease.com/ipa/A0004379.html

Demographic dynamics of South Asia

39

Table 4.2 Population estimates and land use Country

Total land in ’000 sq. km

Population density (in per sq. km)

Land use (arable land in million hectare) 1990

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

2005

1980

2005

1995

2005

arable land

arable land (% of total)

arable land

arable land (% of total)

144 3,288 796 66 330 300 510 330

144 3,288 796 66 330 300 510 310

833 283 163 272 61 230 123 180

1,090 368 202 304 77 110 126 268

— — — — 1 5 17 6

70.2 9.3 26.6 13.5 5.2 18.4 34.2 16.4

—

61.1 9.8 27.6 14.2 5.5 19.1 27.7 21.3

— — 2 6 32 7

Sources: Human Development Report (2004); FAOSTAT: World Bank-World Development Indicators (2004); World Bank (2007)

over 1990–2005 was 1.21 per cent. Among the South Asian nations, Pakistan had the highest rate of growth (2.8 per cent), while Bangladesh had the highest density per square kilometre (1,090). Among the Southeast Asian nations, Malaysia had the highest rate of growth (2.3 per cent) and Vietnam had the highest density per square kilometre (268) (see Table 4.2). Table 4.2 provides further disaggregated estimates on population and land use estimates in the eight Asian nations studied. All the South Asian nations doubled their populations between 1975 and 2005. In Southeast Asia, the populations of Malaysia, the Philippines and Vietnam doubled over the period of 1975–2005. Thailand’s population over the same period increased by more than one and a half times (World Bank 2007). Density of population in 2005 per square kilometre is very high in Vietnam (>250), moderately high in Thailand and the Philippines (>110) and low in Malaysia (<80). In Bangladesh and India, over the last 30 years the density of population increased by 30 per cent, while in Pakistan the density increased by 80 per cent. In Sri Lanka, the density increased by only 12 per cent. Land use in the arable category in 2005 was the highest in Thailand (27.7 per cent) and the lowest in Malaysia (5.5 per cent) out of the total surface land of these nations. In Bangladesh, more than 60 per cent of land was under cultivation (highest) and in India, only 10 per cent of land was under cultivation (lowest) in 2005.

Population distribution Distribution of population by age group and dependency ratio by country are presented in Table 4.3. In recent years (2005), children in the age group 0–14 years constitute the second largest proportion of the total population of each country. In 1996, this proportion was very high for all the countries in South and Southeast Asia. In 2005, this was 38 per cent in Pakistan and 35 per cent in Bangladesh. In India and Sri Lanka, these rates were 32 and 24 per cent respectively. In 2005, these ranged

40

Introduction

Table 4.3 Distribution of population by age and dependence ratio 1996–2004 Country

Age group

Dependency ratio

1996*

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

2005

0–14

15–64

65+

0–14

15–64

65+

42.3 35.8 45.5 31.7 36.2 38.4 26.2 36.0

56.8 60.2 51.1 64.2 59.9 58.1 68.2 58.5

0.9 4.0 3.4 4.1 3.9 3.5 5.6 5.5

35.5 32.1 38.3 24.1 32.4 35.1 23.8 29.5

60.9 62.7 57.9 68.6 63.0 61.0 69.1 65.0

3.6 5.3 3.8 7.3 4.6 3.9 7.1 5.4

1996*

2005

762 662 966 545 670 720 470 710

700 600 800 500 600 700 400 600

Source: US Bureau of the Census, International Data Base at http://www.census.gov/cgibin/ipc/idbagg; World Bank (2007) Note * 1991 figures for South Asia.

from greater than 25 per cent in Malaysia and less than 25 per cent in Thailand to above 29 per cent in Vietnam and the Philippines. The overall figures, however, suggest that the fertility rate in all these countries has declined over the last ten years. The issue of fertility rate is illustrated further in the last section of this chapter. Dependency ratio = Persons 0–14 + 65 and above ⫻ 1,000 Persons 15–64 The dependency ratio in Table 4.3 shows that children (aged 0–14 years) and older people (65 and above) constitute the dependency load for persons of the primary working ages (15–64 years). The dependency ratios reveal that Pakistan had the highest dependency levels of 966 and 800 (per 1,000) and the Philippines had 720 and 700 (per 1,000) respectively in 1996 and in 2005 among the countries studied. However, dependency has declined for all the countries of these regions. Table 4.4 Labour force participation rates, by sector 1980–2005 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

1979–91

2005

Agriculture

Other

Agriculture

Other

59 62 47 49 41 52 71 73

41 38 53 51 59 48 29 27

55 — 51 36 17 38 55 67

45 — 49 64 83 62 45 33

Source: FAOSTAT: World Bank-World Development Indicators (2004); World Bank (2007)

Demographic dynamics of South Asia

41

Table 4.4 presents the labour force participation rates for the eight countries by sector for 1979–91. Under the ‘other’ category, the figures mainly show combined participation in the industrial and services sectors. The figures for all the countries in 1979–91 suggest that the agricultural sector was the major source of labour force utilization. This picture radically changed for every country in 2005; however, the changes were prominent for Sri Lanka and Malaysia.

Female labour force participation In recent years, development literature has been inundated by studies on female participation in development in developing countries (Agarwal 1986; Schultz 1989; Boserup and Harris 1990; Sen 1990; Bardhan 1993; and Quibria 1993). In the early 1990s, UN agencies undertook numerous studies on women and their role in future development of developing countries. Table 4.5 presents some related information from selected Asian countries about the equality standard of women against that of men. Women’s participation in a country’s labour force is one of the important indicators of the role of women in development. Table 4.6 presents detailed comparative information on female labour force participation for a sample of eight countries of South and Southeast Asia over 1990 and 2005. More than one-third of the labour force consisted of women in Bangladesh and Sri Lanka in 2005. Almost half of the Vietnamese and Thai labour forces were made up of women in the same period. In the Philippines, women made up almost 40 per cent of the labour force, while in Malaysia women constituted a third of the labour force. In all the countries except Bangladesh, India, Sri Lanka and

Table 4.5 Women in development in selected Asian countries 1990–2005 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Life expectancy of females as a % of males

Female adult literacy rate (% of people over 15)

1990

2005

1990

2005

99 101 100 106 106 107 106 107

103 102 102 107 107 106 106 107

22 34 21 84 70 — 90 —

— 48 36 52 85 93 91 88

Source: http://genderstats.worldbank.org Note Figures are expressed in relation to the male average, which is indexed to equal 100. The closer the figure is to 100, the smaller the gap and a figure above 100 indicates that the female average is higher than that of the male. Decimals are rounded.

42

Introduction

Table 4.6 Female labour force 1990–2005 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Total labour force (millions)

Female labour force (% of total labour force)

1990

2005

1990

2005

46.9 335.1 35.2 7.3 7.1 23.4 30.4 31.3

63.9 435 56.2 8.4 11 37.1 35.6 44

40.2 29.9 23.3 38 34 36.6 46.6 48

36.9 28.4 27 32.9 35.8 39.8 46.2 48.5

Source: http://genderstats.worldbank.org

Thailand, female participation has been increasing since 1990. Bangladesh, India, Sri Lanka and Thailand have been slightly decreasing over the last decade.

Demographic challenges By 2005, South Asia’s population in the countries studied reached more than 1.85 billion compared to 1.2 billion in 1975. World Bank (2004) projections suggest that by 2015 the total population of the region will reach close to 2 billion (1.98 billion). It is a picture which is far less alarming than the other regions of Asia (the Far East), particularly when one looks at population densities (see Table 4.2). It has, however, put the policymakers at ease that the contraceptive prevalence has been increasing substantially in the populous nations of the regions. For example, between 1995 and 2005, this has in fact increased from 43 to 47 per cent of women aged between 15 and 49 in India and it has remained unchanged in Thailand (72 per cent) in the same age group (see Table 4.7). This development Table 4.7 Contraceptive use rates 1995–2005 Country

Bangladesh India Pakistan Sri Lanka Malaysia Philippines Thailand Vietnam

Contraceptive prevalence (% of women aged 15–49) 1995

2005

46 43 12 62 56 48 72 75

58 47 28 70 — 49 72 77

Sources: Global Population Profile (2002) USAID; http://genderstats.worldbank.org; World Bank (2007); http://www.infoplease.com/ipa/A0004379.html; http://www.census.gov/ cgi-bin/ipc/idbagg

Demographic dynamics of South Asia

43

would certainly not help in reducing the growth rate of the population in Thailand as predicted by the World Bank by 2015, the cut-off year for achieving MDGs. It must be emphasized that in South Asia, particularly in Pakistan and Bangladesh, the population growth rate has been bouncing back in recent years after a significant slide in the final quarter of the twentieth century. The increasing trend has been attributed to the lack of budget allocation and the decline in support by the international community to the direct population control measures. A recent report by the population and family planning department of the government of Bangladesh identified several issues that are behind the collapse of the population programme implemented over the last two decades. These are: lack of sustained field-level workforce, corruption in procurement of relevant effective population control devices and declining morale of the existing workforce due to the lack of initiative by recent governments to keep the dedicated workforce in the departments. In particular, it has been reported that the success in the past had been brought by the field-level workers who visited the households in rural areas regularly. For example, out of the total rural households in Bangladesh, almost 43 per cent had been visited in 1993–94. This dropped to 35 per cent in 1997–98. In 1999–2000 this dropped even further to only 18 per cent. The major reason for such a drop in visit was lack of condoms, pills and other related population control devices. Moreover, out of more than 50,000 field workers, almost 7,500 positions are presently vacant (15 per cent of the total). This is no doubt contributing towards destroying the morale of the existing workers and results in the decline of service to rural areas, where demand for population control devices still exists (Prathom 2009). In the last census (2001), India reported that the population of the country rose by 21.34 per cent in the period 1981–2001. Hansen (2002) suggests that in the last several decades, fertility control policies in India have failed to promote a sustainable solution to the problem of overpopulation. What factors have caused these efforts to disintegrate? The following have been suggested: • • • •

India reached the one billion mark in August 1999 in a country one-third the size of the United States. This is certainly alarming. India’s population has more than doubled between 1960 and 2000. In 1960 the population was less than half a billion (431,463,000). It appears that the national sterilization scheme had not achieved a desirable outcome. Targeting female sterilization was a failure over the last few decades.

In addition, the major challenge for India is the family’s strong preference for sons. This made the overall male to female ratio quite imbalanced in recent years (Begum et al. 2007). The sex ratio in the 2001 census suggests that the number of females per 1000 males was 933. It rose marginally from 927 in the 1991 census (www.indiaeyewitness.com). As mentioned earlier, Pakistan has the highest rate of growth in the region. The population control policy has been put on the back burner in Pakistan since the period after 11 September 2001. United States Aid (USAID) was the major

44

Introduction

donor agency in Pakistan. It was the source of funds for the family planning department. There was a pause of USAID assistance in 2001–03 since the agency closed its offices in Pakistan after 9/11. USAID is back again now and extended $60 million to Pakistan in 2008 to address the population control issue. With the present Taliban insurgency Pakistan is facing, it is unlikely that the country is going to put many resources into population control and the problem is going to take a bad turn in the years to come (The Nation 2008). Sri Lanka was a high achiever in controlling population in the 1970s and 1980s. When the nation experienced civil war in the 1980s, it slipped from the demographic literature for this period. However, it appears that most recently the government policy is to satisfy the demand for various family planning methods, demand which has been created by a well-developed and well-promoted fertility control programme during the past phases of policy implementation. Under this policy, greater emphasis is simultaneously being given to improving reproductive health (Dangalle 1998).

Further readings UNFPA (2008) Mosher, S. W. (2008) Rao, A. J. (2001) Connelly, M. (2006)

Part II

South Asian economic development

5

Human resources and economic performance

The performance of South Asian economies over the last decade, documented at length at previous junctures in this book (particularly when compared with East Asian benchmarks), is of course the product of the economic reform process carried out since the early 1990s. This chapter dwells on the issue of human resources. A key component of the discussion is its focus on identifying best practice policy guidelines in attaining satisfactory levels of human development (in the sense used by the UNDP; see Chapter 3). This chapter argues that the need for improving human resource endowments deserves careful interpretation. One can readily agree that public investments in basic education and primary health care are desirable both as ends in themselves and as means of facilitating growth. However, one needs to be much more circumspect about ambitious claims of human resource-led development. The epithet implies that investments that lead to the expansion of human capabilities (as reflected, for example, in literate and well-nourished citizens) will be the primary mover of economic growth. The broad evidence, as is argued below, does not support this claim. There is, at best, two-way causality: economic growth and human development are mutually reinforcing. This means that policies that promote growth remain centrally relevant to the topic of human resources.

The role of human resources in economic development: some conceptual issues To start with, it would be useful to identify different strands in the literature that are directly pertinent to the relationship between human resources and economic development. These include: • • • •

conventional human capital theory; ‘new’ growth theories; the work of the UNDP through its well-publicized ‘Human Development Reports’, which have been published annually since 1990; socio-cultural determinants of human capital formation.

48

South Asian economic development

Conventional human capital theory and new growth theories The common thread in these theories is the notion of human beings as means of production. Individuals have endowments of talents and skills – hence the terms ‘human capital’ or ‘human resources’ – which enable them to produce goods and services. When such endowments are enhanced through a combination of formal and informal training, they can be seen as equivalent to investment in physical capital. Thus if investment in physical capital leads to higher growth, investments in human capital also lead to higher growth. It is this intellectual tradition that underpins the well-entrenched view that the superior performance of the economies of East Asia relative to other economies has to do with their human resources in the form of an abundant supply of skilled workers. The Asian Development Bank represents a good example of this view: An examination of the postwar economic record of the . . . NIEs and the more advanced Southeast Asian countries reveals that human capital formation has been a crucial underlying factor in these countries growth . . . Even though it is difficult to quantify the contribution of human capital to economic growth, there is virtual unanimity regarding its critical role. (1989: 153–4) The notion of human capital has, of course, been known in the development literature since the 1960s. However, much of the current enthusiasm over human resources can be traced to so-called ‘endogenous growth theories’ expounded by such practitioners as Romer (1986, 1990), Lucas (1988, 1990), and Grossman and Helpman (1990). The recent wave of growth theories broke away from the Solow-Denison approach, which treated technical progress as exogenous and incorporated human capital in the production function. Human capital became an endogenous variable that drove the growth process. For both Romer (1986) and Lucas (1988), for example, human capital accumulation has externality-inducing effects. Thus, the average level of human capital in a community has a favourable impact on the productivity of a typical worker in addition to his/her endowment of human capital. The advocates of the new growth theory emphasize the knowledge knock-on effects due to learning by doing. There could also be a close interaction between formal education and training and learning by doing, to the extent that the capacity to engage in the latter is enhanced by the former. The assumption in new growth theories of externalities in human capital are typically combined with the assumption of increasing returns to scale in production. If human resource-led development simply means the role that human capital formation plays in economic development à la human capital theory and recent growth theories, then it appears to be a relatively non-controversial proposition. One ventures into more contentious terrain when the proposition becomes prescriptive: that through deliberate and aggressive investments in education and training one can change the comparative advantage of an economy from low-skill

Human resources and economic performance

49

labour-intensive products to more skill-intensive goods and services, thus attaining rapid, internationally-oriented growth. The answer is not as clear-cut as it appears. In the case of the conventional human capital theory, the returns to education and training are appropriated by individuals through higher earnings. Thus, to the extent that both the formal education and training system and the labour market operate efficiently, utility-maximizing decisions at the individual level will lead to socially optimal investments in human capital. It is not obvious that a case can be made for interventionist public policy in terms of traditional human capital theory. In the case of new growth theories, externalities and increasing returns to scale will cause the social rate of return on investments in human resources to exceed the private rate of return and engender market failure. This creates a role for more active public policy in the sense that various measures could be designed to rectify such market failure. It needs to be noted that the optimism that characterizes both conventional human capital theory and new growth theories in regard to human resources is not shared by all practitioners. Consider, for example, the screening hypothesis which maintains that education merely serves as a screen or sieve through which able and trainable workers are allocated to different jobs in society (e.g. Thurow 1974). The education and training system has social value to the extent that it can fulfil its screening function efficiently. Some radical critics have taken this critique a step further. The schooling system, such radical critics maintain, essentially entails an inter-generational reproduction of the class structure. Those receiving education come from favoured backgrounds and that the primary function of the schooling system is to instill a sense of diligence and a respect for authority. Such arguments imply radical reform of the social and economic system as a prerequisite for any conceivable reform of the school system in a market economy. It also needs to be noted that human resources represent one variable among many that are pertinent to the process of economic growth. As Stern’s (1991) survey of the proximate determinants of growth shows, other major proximate causes of growth include: physical capital accumulation; research and innovation; quality of infrastructure; intersectoral shifts of resources; and management and organization. Not surprisingly, the Asian Development Bank, an ardent advocate of human resource-driven development, tempers its position by injecting a note of caution: Human resources alone . . . are not sufficient. Sustained economic growth depends crucially on how well these resources are developed and how efficiently land, capital and technology are mobilized . . . Educated manpower may be wasted if capital and raw materials are lacking, if economic policies are inappropriate, if enterpreneurship is lacking, or if political structures are unstable. (1990: 170)

UNDP: human development vs. human resource development As noted, the UNDP has, since 1990, tried to carve a distinctive niche in this sphere of study. It maintains that its approach is different from the conventional conception of human beings as means of production. As UNDP puts it:

50

South Asian economic development Human resource theory treats people as ‘human capital’ – merely another productive input on a par with physical capital or natural resources . . . Those who advocate human development take a different view. Certainly, they welcome improvements in health or education. But they regard these as valuable in their own right. Human capabilities, such as health or knowledge, are more than means of achieving human well-being. They are essential components of human well-being. (1996: 54)

Despite this commendable distinction, UNDP recognizes that in practical and operational terms, it may not matter a great deal. Thus: Despite the fundamental differences between human resources development and human development, there are areas of common interest. Indeed, it might be argued that if both would result in, say, better health or education, the distinction is immaterial. The motives might be different, but the outcome would be the same. (1996: 54) The discussion in this chapter thus regards it as legitimate to blur the distinction between human resources and human development. In Chapter 3, the emphasis was on the latter primarily because the objective was to evaluate the attainment of outcomes (e.g. literacy, public expenditure in basic social services, etc.) rather than to judge the efficacy of alternative means of attaining such outcomes. In this chapter, the focus is on means or, more specifically, policies and strategies that would enable South Asian economies to attain higher levels of human development.

Socio-cultural determinants of human capital formation One argument that is often heard is that the superior human capital endowment of East Asia relative to South Asia and other developing economies (see Chapter 2 for some pertinent evidence) can be traced to their distinctive socio-cultural roots. It is customary to regard economies such as Korea and Taiwan as ‘Confucian’ societies. As O’Malley observes: . . . [T]here is a background culture binding these people together, a culture steeped in Confucianism . . . Confucianism has gone through any number of metamorphoses over the course of two and half millennia, but key elements of it have endured . . . to the present. (1988: 332) What are these ‘key elements’ of post-Confucian culture? How do they relate to human capital formation? Post-Confucianism is best seen as a code of ethics and conduct that is meant to guide relationships between human beings: between generations, within families, between ruler and ruled. The value system is essentially

Human resources and economic performance

51

hierarchical, with mutual obligations and expectations that are widely shared and understood. Subordinates show respect, loyalty and deference, while superiors lead by example and set the highest moral and intellectual standards. This was formalized in the fact that in ancient Confucian societies (e.g. Imperial Korea), those in charge of administration were expected to maintain high standards. Such high standards were maintained by a recruitment process that was based on a rigorous examination that tested intimate knowledge of the classics and their lessons (O’Malley 1988: 333). Education thus served as an entry barrier to status and esteem in a hierarchical society, but at the same time provided a route for social mobility. The examination system (in principle at least) was open to members of all backgrounds and occupational groups. One could argue that the current tradition of meritocratic recruitment to the civil service in East Asia and the strong social demand for education can be traced to the historical lineage of Confucianism. It motivated parents and children with diverse backgrounds to seek social advancement through the route of education. Furthermore, the traits of loyalty and deference to superiors provided students with the aptitudes of dedication and diligence that are necessary in acquiring mechanical skills in an efficient fashion. How convincing is this socio-cultural approach in understanding the superior human capital endowment of East Asia relative to South Asia? To start with, one needs to emphasize the point that not all East Asian economies belong to the Confucian mould. It is difficult to suggest that the Philippines, Indonesia and Malaysia are quintessential exemplars of post-Confucian culture. Despite this, human capital endowments have always been high in the Philippines, even by East Asian standards. Both Malaysia and Indonesia have made commendable achievements in attaining near-universal primary schooling. Equally anomalous examples can be found in South Asia. Consider the case of Sri Lanka. Its human capital endowments are most impressive. The lack of postConfucian values does not seem to have been a hindrance in the case of Sri Lanka. More generally, it is difficult to argue that the social demand for education is less intense in South Asia than in East Asia. This is a reflection of the fact that the demand for education is significantly driven by economic incentives rather than pre-determined socio-cultural traits. When the private cost of education is low, given state subsidization, the demand for such low-cost services will inevitably be higher than in cases where prices reflect true resource costs. As the subsequent discussion highlights, state subsidization of education at higher levels is in fact more significant in South Asia than in East Asia. Finally, it needs to be emphasized that recruitment to the public service is also based on a merit-based examination system in South Asia. While its historical lineage is not as old as Confucianism, the merit-based recruitment system that underpins the civil service (especially at higher echelons) in South Asia has evolved under British colonial rule for well over 200 years (see Chapter 1). In sum, the socio-cultural approach to the understanding of the superior human capital endowments of East Asia relative to developing country standards overstates its case. While specific cultural traits may well have facilitated the process of

52

South Asian economic development

human capital formation in East Asia, determined public action was of far greater importance. Furthermore, the lack of a post-Confucian culture has not inhibited human capital endowments in parts of both East Asia and South Asia. PostConfucian culture is best seen as a particular expression of universal human values: the quest for self-improvement and advancement is evident in all societies. More importantly, as the discussion amplifies, having superior human capital endowment can only be conducive to sustained economic growth if it is supported by complementary policies.

Human resources and economic development: evidence and policy issues from a South Asian perspective Ultimately, it is at the level of empirical evidence that one can form some judgement on the role of human resources in economic development. The discussion at this juncture will draw on cross-country evidence. Cross-country evidence Some observers have expressed the view that, despite the presumption that human resources play a central role in economic development, the cross-country evidence is not robust. Sceptics include Behrman (1990) and Booth (1994). Behrman (1990) offers a comprehensive review of the evidence and arrives at the following conclusion: There appears to be some evidence about the association between human resource investments . . . But there is surprisingly little systematic quantitative evidence for the proposition that human resource investments cause substantial development or that the usual types of market failures warrant much higher human resource investments than would occur without activist policy interventions. (1990) Booth (1994: 77–8), in a review of Ogawa et al. (1993) and Asian Development Bank (1990a), expresses ‘nagging doubts’ about the association between human resources and economic growth. Booth focuses on two ‘outliers’: the Philippines and Thailand. In the case of the former, human capital endowment has historically been one of the best in Southeast Asia, yet it remains an economic laggard. Thailand has lagged behind, especially in post-primary education. However, Thailand has been one of the most rapidly growing economies in the Association for Southeast Asian Nations (ASEAN). In the case of South Asia, Sri Lanka also stands out as an outlier, as has been noted and as previous chapters have documented. Commendable achievements in human development do not seem to have translated into a commendable growth record. At the same time, Pakistan has growth rates that are above average for the region, yet the country has a poor record in human development.

Human resources and economic performance

53

One could argue that the existence of a few exceptions and outliers does not prove that critics of human resource-driven strategy are right. Hence, it would be useful to consider econometric tests of the causal relationship between human resources and economic growth based on large-scale cross-country data. Two good examples are Otani and Villaneuva (1989) and Azariadies and Drazen (1990). The former considers annual average data for the 1970–85 period for 55 developing countries. The study finds that investment in human capital, measured by the ratio of government educational expenditure to GNP, had a significant impact on economic growth. But in quantitative terms, this was less than the corresponding effects flowing from the export growth rate and the domestic savings rate. The study then tries to qualify this conclusion by arguing that if one takes into account private sector investments in education and the entire economy’s investments in health, nutritional intake and on-the-job training, the financing of investment in human capital probably would be a much more significant contributing factor to long-term economic growth. Azariadies and Drazen (1990) represent a study that is very much in the spirit of the new growth theories. They use a formal model to capture the point that for countries with the same per capita income, those with higher endowments of human resources would have higher (future) growth. This idea is then econometrically tested using a sample of 32 countries, including some Asian economies. The evidence in favour of their hypothesis is limited and, as Behrman (1990: 79) argues, sensitive to statistical estimation problems. Romer (1989), who has also tried to test new growth theories using cross-country data, readily concedes that the evidence is ‘tenuous at best’ (as cited in Behrman 1990: 81). More recent studies that have tried to examine the significance of human resources as a determinant of cross-country growth rates include the World Bank (1993), Birdsall et al. (1995) and the ADB (1997a). The following points, based on these studies, are worth highlighting: •

•

•

Not all proxies for human capital work equally effectively. Thus, for example, secondary school enrolment rates exhibit weaker performance as a variable relative to primary school enrolment rates in some specifications. Measures of educational attainment do not perform much better and, in the case of one study, are statistically insignificant. Some studies find only a weak influence of human resources on economic growth. Thus, for example, the ADB (1997b: 75), drawing on the work of Radelet et al. (1996), notes that: ‘(t)he relationship between growth and education is statistically somewhat weaker than . . . other variables’. ‘Demand-side’ factors (proxied by a liberal trade regime) and an enabling environment (proxied by government fiscal policy and quality of institutions) turn out to be significant variables in explaining growth.

Sengupta (1991, 1993) represents some recent examples that seek to test the validity of new growth theories by focusing exclusively on the experience of the East

54

South Asian economic development

Asian Newly Industrialized Economies (NIEs). The conclusion, based largely on the experience of Korea, is that investment in human capital, increasing returns to scale and the impact of openness in international trade are the key determinants of the growth process in the NIEs (see Sengupta 1993). Such a conclusion has to be interpreted with care. One could readily argue that it is really a test of the benefits that flow from an outward-oriented trade regime rather than human resources per se. If a country rich in human capital endowments combines this with a dirigiste regime, then this may offset the growth potential of human resources. Furthermore, the indicator that Sengupta (1993: 348) uses for measuring human capital (lagged output per worker) is really a measure of learning by doing rather than formal education. This leaves open the question of public policy in human resource development because one could argue that it is an issue best left to the private sector. Patrinos (1994) highlights, among others, the contributions of Tallman and Wong (1990) and Juoro (1993) as illustrations of the validity of endogenous growth theory in understanding the process of economic growth in individual countries. Tallman and Wong (1990) study the case of Taiwan using a new growth theoretic framework using annual data for the period 1965–86. They use a Barro and Lee-type (1993, 1996) index of human capital in terms of years of schooling that is a transformed measure of the proportion that attended university and technically-oriented colleges. They find that this enables them to conclude that human capital accumulation – as reflected through a skill-augmented labour input measure – plays an important role in explaining Taiwanese economic growth. Note, however, that – as in the case of Sengupta (1993) – the influence of an open economy is critical. In fact, the authors explicitly use an open economy model of endogenous growth theory. The theme of the virtuous interaction between economic openness and human capital accumulation is also evident in the literature on industrial growth in coastal China. These studies maintain that while education has an important impact on industrial growth in China, its effects are augmented by the knowledge acquired through international links (in the form of foreign direct investment). The studies reviewed so far start from the premise that human resources cause growth. What about the possibility that growth in turn causes a higher level of human development to be attained? UNDP recognizes this possibility and offers an econometric test of two-way causality between human development and economic growth using cross-country data covering three decades (1960s to the early 1990s). It focuses on two human development indicators (life expectancy and child mortality) and three variables (growth of per capita income, share of GDP invested in health and education and an index of income inequality, which is the income share of the poorest 20 per cent). It proceeds with the exercise in two stages. First, it links improvements in human development to the three variables noted above. Second, it links improvements in growth rate to one human development indicator (life expectancy), gross domestic investment and the aforementioned index of inequality. Its key conclusions are:

Human resources and economic performance

55

The higher the growth rate of income and the share of GDP invested in health and education, and the more equal the distribution of income, the higher the rate of improvement in human development indicators . . . In turn, human development was found to be an important determinant of the rate of growth of income – the higher the life expectancy, the higher the per capita income growth rate. (UNDP 1996: 113–14)

Policy lessons What implications follow from the findings reviewed so far? What is clear is that economic growth is driven by a complex set of variables, entailing human capital, supportive policies and an enabling environment, that in turn allows favourable demand conditions to absorb the ready supply of skills. An additional implication of this demand and supply framework for analysing the role of human resources in economic growth is that it allows one to reconcile the problem of outliers, such as the Philippines and Sri Lanka. It is not enough to have above-average human capital endowments and expect them to feed through into higher growth. If there is weak demand for skilled/educated labour, then such endowments will not be efficiently utilized and their full potential in terms of their impact on growth will thus not be realized. In the case of the Philippines and Sri Lanka, as in the case of many developing economies, permissive demand-side conditions were insufficiently present. This is largely because of the lack of supportive policies and an enabling environment. The findings reviewed also highlight the fact that improvements in human development are sensitive to public investments in health and education (see UNDP 1996). As a broad guideline this is useful, but one needs to resolve a range of important issues. They pertain to the appropriate benchmarks that policymakers should monitor and the mechanisms that should be used for allocating government expenditure in health and education. One way to arrive at appropriate benchmarks is to consider the share of GDP devoted to health and education in countries that fall in the UNDP’s classifications of ‘high’ and ‘medium’ human development and compare them with South Asian standards. This provides an indication of the extent of the shortfall in South Asia relative to international best practice. The appropriate benchmarks turn out to be approximately 2 per cent of GDP in health and approximately 4 per cent of GDP in education (UNDP 1996: Statistical Appendix, 160, 164). In both areas, Bangladesh, Pakistan and India record a deficit, but the extent of the catch-up that is required is not particularly onerous in the case of India (see Table 3.2). Another way of formulating a benchmark that would be suitable for South Asia’s policymakers is to refer to the ‘human development compact’ suggested by the UNDP in an earlier report (1994). The core suggestion in the compact is the socalled ‘20:20 initiative’. This entailed the recommendation that 20 per cent of aid flows and 20 per cent of a developing country’s budget should be earmarked for basic social services.

56

South Asian economic development

In a subsequent assessment UNDP (1996: 73) observes that the effective methods of monitoring the 20:20 initiative are lacking at both national and international levels. In the absence of such effective monitoring, the discussion at this juncture adopts a rough-and-ready approach. It focuses on the proportion of central government expenditure devoted to social services in South Asia and relates it both to the human development compact and the actual standards achieved by countries that are clustered in the high and medium human development index. Note that even this apparently simple approach ran into problems of data availability. Only two countries are covered: Sri Lanka and India. As expected, Sri Lanka has spent well above the 20 per cent benchmark and India has spent well below the recommended norm, which offers some clue to the rather different human development outcomes in the two countries (see Table 5.1). A method that focuses on the relative size of public expenditure on basic social services as a whole is open to criticism in that it does not focus on a range of substantive policy issues in this area. Typical questions that need to be resolved include the following: What should the allocation criteria within education and health sectors be? Should one focus more on vocational education vis-à-vis general education? Does the expenditure pattern in the countries under review fit the recommended criteria? How does one deal with financing issues, given that any recommendation that entails an increase in public commitment to human development will involve extra resources? Should public policy with respect to the development of human capabilities be the exclusive domain of the government or is there scope for collaboration with business and civic organizations? Both theory and evidence have evolved to a stage where one can offer some sensible responses to the policy-driven questions highlighted above. A summary follows: •

• •

•

In terms of developing allocation criteria, one should focus on the social returns on different levels of investments in human resources, given that the aim of public policy is to maximize social returns on such investments. Within the specific case of education and training, South Asian governments should avoid the vocational school fallacy. In terms of financing human development, a lot can be achieved by applying cost-recovery schemes, in such areas as post-secondary education, by restructuring public expenditure (in particular by rationalizing defence expenditure) and through the mode of privatization. In terms of delivery and implementation mechanisms, governments in the region should be mindful of their limited administrative capabilities and Table 5.1 Relative size of social expenditure in South Asia (as at 1995) vis-à-vis the 20:20 initiative of the UNDP (% of total central government expenditure) India Sri Lanka Source: World Bank (1997, Table 14: 240)

11.9 46.2

Human resources and economic performance

57

disengage from the widely-held view that delivery and service mechanisms must remain the exclusive domain of the public sector. There is scope for private–public sector collaboration, the co-option of civic organizations and community participation. All these propositions deserve some amplification. Allocation criteria and the vocational school fallacy There is a well-established literature that examines social returns to investments in human resources. The most readily available estimates are in the area of education across a wide set of countries. Psacharopoulos (1973, 1981, 1985, 1994) has played a central role in assembling information across countries on returns on education. Despite his monumental efforts, the availability of information is quite dated and sparse for South Asia. Nevertheless, the estimates are presented in Table 5.2 for India and Pakistan. Despite their dated nature, the data in the table are useful for identifying broad patterns and for deriving implicit measures of the public subsidization of education. Thus, if private returns exceed social returns at any particular level of education, it implies public subsidization for that level. The pattern that can be observed for India and Pakistan shows that social returns are highest for primary education and lowest for tertiary education. Commitment of public resources to primary education is thus fully justified. While this conforms to international benchmarks, the social return on primary education is quite low in Pakistan (13 per cent) relative to the low-income country norm (23 per cent). Table 5.2 also reveals that the public subsidization of higher education is much higher in Pakistan than in India. While one should not put too much reliance on a single year’s data, one could still maintain that the policy implication that follows from this is that much greater vigilance needs to be put in Pakistan on re-focusing attention on primary education. Consider now the issue of vocational education. There is a widely-held view that public policy should focus on vocational and technical education and training. The general presumption is that certain industrial and training skills are seen as necessary for economic development and that these skills need to be provided by a Table 5.2 Private vs. social rates of return to education in South Asia (%) Region

Private primary

Private Private secondary tertiary

Social primary

Social secondary

Social tertiary

India Pakistan Low-income economy (average)

33.4 20.0

19.8 11.0

13.2 27.0

29.3 13.0

13.7 9.0

10.8 8.0

35.2

19.3

23.5

23.4

15.2

10.6

Source: Psacharopoulos (1994, Appendix for India and Pakistan, Table 1.0 for the low-income country average) Note Data for India pertains to 1978; data for Pakistan pertains to 1975.

58

South Asian economic development

state-sponsored training system. One can, of course, invoke a market failure rationale to underpin this view. There are well-known externalities (e.g. training provided to workers by one firm can be transmitted to others through labour mobility) that can lead private-sector firms to underinvest in vocational training. Hence, there is a potential role for the government in the socially optimal production of industry- and occupation-specific competencies. Foster (1966), in a seminal contribution, challenges this orthodoxy by focusing on the experience of Ghana and introducing the ‘vocational school fallacy’ in the development literature. The vocational school fallacy is the product of a number of factors. First, labour market realities are such that the ex-ante and ex-post rewards to academic training seem to be higher than vocational training. Second, the unit costs of vocational training are higher than academic training. Not surprisingly, the cross-country evidence yields rates of return (both social and private) that are below general, academic training (Psacharopoulos 1994). Furthermore, one needs to recognize that there are inherent complementarities between technical training and general education, as noted by new growth theories. This point is strongly endorsed by the work of Mingat and Tan (1988), who examined the training component of 115 World Bank agricultural and non-agricultural projects. They conclude that the returns on such investments in project-related training are high, but they emphasize that these are contingent on the educational base of a country being sufficiently developed. Finally, Metcalf (1985), in a thorough review of the evidence, finds that training in industrial institutes and vocational secondary schools is less cost effective than more informal firm-based training in India and other countries that were reviewed. In sum, the message is that South Asian policymakers ought to avoid the vocational school fallacy and refrain from a massive expansion of vocational training. Nevertheless, there is a role for the government in terms of information sharing with the private sector on key training issues and in ensuring a well-functioning labour market that can send speedy, reliable signals to private sector firms on impending shifts in labour skills. Financing and delivery mechanisms A firm commitment to the expansion of human capabilities inevitably raises budget, design, delivery and implementation issues. Consider financial issues. External funds through donor agencies is certainly an option in financing human development, but as the UNDP (1996: 76) notes with some disappointment, the track record of donors in developing an effective mechanism for earmarking aid budgets for human development along the lines of the 20:20 initiative is simply not good enough. There are too many competing priorities. Furthermore, concessionary external funds through donor agencies have actually been falling in real terms. In such an austere climate, developing economies in general, and South Asia in particular, will have to find the will and the means to mobilize domestic resources for human development. There are, however, sensible policy options that one can explore.

Human resources and economic performance

59

A lot can be achieved through fiscal restructuring. As noted in Chapter 4, military expenditure has actually increased in the South Asian economies in recent years – despite a changing international context in which the end of the Cold War created an unprecedented window of opportunity for capitalizing on the global peace dividend. Scarce resources can be released and targeted to basic social services through a rationalization of defence expenditure. The projected savings from this rationalization can be as much as $7.3 billion (see Chapter 4). A comprehensive programme of privatization can be another source of revenue that can be tapped to fund investments in human resources (see Chapter 9). Several authors (e.g. Jimanez 1990; Tan 1985; and Roth 1987) argue for applying cost recovery schemes as an alternative to the indiscriminate public subsidization of education and health. There is a considerable body of evidence that shows that such subsidization is, in fact, regressive, as the benefits have disproportionately gone to higher socio-economic groups. This has misaligned private and social rates of return and caused unsustainable budgetary strains and a deterioration in the quality of the education and training system. As a general pattern, South Asian economies seem to allocate approximately 15 per cent of the budget for higher education, which is disproportionately used by higher socio-economic groups. The corresponding number is 7 per cent for Korea (UNDP 1996: Statistical Appendix, 164). The application of cost-recovery schemes in post-secondary education can go some way towards releasing scarce resources that can be re-directed to primary education and basic health care. As one would expect, concerns have been expressed that the application of user fees through cost-recovery schemes may militate against the need to protect the educational participation of the most vulnerable segments of society (e.g. Lewin and Berstecher 1989). Thus, the challenge is to supplement cost-recovery schemes with a feasible safety net for protecting the interests of the very poor. A commitment to expanding human resources is not merely a case of finding additional resources. A critical constraint stems from designing feasible and cost-effective mechanisms for delivery of basic social services. There is a general presumption that the delivery of social services should be the domain of the public sector. There is now an emerging view that there is considerable scope for the private sector and civic organizations to supplement public sector activity. An inspiring example can be offered from Bangladesh (World Bank 1996: 35). The Bangladesh government is the major provider of primary education and runs about 50 per cent of the primary schools. When it comes to non-formal education, NGOs, however, are the major providers, accounting for 76 per cent of total enrolment. They operate a three-year programme which enables students to subsequently join the formal education system. A study of one leading NGO, Bangladesh Rural Advancement Committee (BRAC), shows that such schools have performed appreciably better in terms of low drop-out rates and low repeater rates. There is a rich potential here for the Bangladesh government to disengage from the legacy of 1973, when primary schools were nationalized. This entailed the incorporation of 36,165 schools under a monolithic centralized bureaucracy with

60

South Asian economic development

a complex, multi-layered and inflexible management system. The governments in recent years are belatedly moving in the direction of greater decentralization and community participation in the provision of primary education. The caretaker government in 2007–08 contemplated giving a major part of the primary education burden to BRAC for managing and making education quality on a par with the BRAC-style primary schooling in Bangladesh. Successful examples of public sector–private sector complementarities in the provision of basic social services can also be found in other parts of the world. One case is Bolivia, where some publicly-funded schools were contracted out to a church-based organization for management and operation with a great deal of success (Turner and Hulme 1997: 127). Yet another example can be derived from Kenya where, for a small fee, informal-sector workers are granted vouchers which they can redeem at either public or private institutions. This example suggests how governments can devise affordable mechanisms to provide students or parents with choice and thus create competitive pressure on public institutions without necessarily sacrificing the goal of access for vulnerable members of the community (Turner and Hulme 1997: 127). In sum, the emerging view is that the provision of basic social services should not be seen as the exclusive domain of the public sector. South Asian policymakers can build on successful examples from their own region and elsewhere to devise delivery mechanisms that can effectively exploit the synergy that exists between public sector–private sector initiatives.

Concluding comments The South Asian economies (with the notable exception of Sri Lanka’s economy) are conspicuous for their low level of human development. The expansion of human capabilities is an end in itself. It can also facilitate faster growth. This does not mean that ambitious claims of human resource-led development are valid. It simply means that human resources can reach their full potential when other supporting factors are present. Cross-country evidence reveals a two-causality between growth and human development. This implies that the goal of promulgating policies that promote growth in general cannot be forsaken for the romantic notion that an uncritical expansion of human resources will unravel the secret of escaping from the region’s poverty. Furthermore, one must eschew the notion that the process of human capital endowments requires predetermined socio-cultural traits. In terms of policy issues pertaining to human resources, a number of significant points were made above. The key message is that South Asian governments must assign priority to directing more resources towards primary education and health, but in moving in this direction they have to take note of the need for establishing efficiency criteria for resource allocation both between and within sectors. A strong case can be made for restructuring public expenditure, for applying cost recovery schemes to higher levels of education and health care and for exploiting the synergy between public and private sector initiatives. South Asian governments can learn

Human resources and economic performance

61

from cases of success within their own region as well as inspiring examples from other parts of the world.

Further readings Chaturvedi, S. K., Sharma, S. K. and Kumar, M. (2008) Mahbub-ul Haq Centre (2008)

6

Labour market institutions and economic performance

There is an enduring view that South Asian economies, in common with many others in the developing world, are characterized by widespread labour market distortions (e.g. Joshi and Little 1994: 25–30 on India and an internal World Bank 1995a report on Sri Lanka). The corollary of this view is that labour market imperfections, such as trade union militancy and job security legislation, impede efficient resource allocation and thus constrain the capacity of the economies of the region to grow faster. The policy prescription that follows from such theorizing is quite unambiguous: alleviation of labour market imperfections, in conjunction with other policies, will enable South Asian economies to grow faster. Rapid growth in turn will lay the foundations for sustained reductions in poverty. The position taken in this chapter is that the aforementioned policy prescription is not as simple as it seems. The issue of reforming labour market institutions is quite complex and deserves careful reflection. Such institutions as trade unions can be seen as impediments to growth, but they can also be harnessed to play a productive role. This chapter also extends the analysis to offer brief reflections on such sensitive issues as child labour and gender discrimination in the labour market. The discussion suggests that effective methods of dealing with such major social issues lie less in the domain of formal legislation and more in the sphere of general purpose policies that bear on human development. In propagating such prescriptions, a preamble is needed. The subsequent sections provide such a preamble.

The labour market and economic development: two views The notion that developing economies in general are characterized by labour market distortions is identified by Freeman (1993) as the ‘distortionist view’. This, he claims, is typically associated with the work of the World Bank – although in more recent contributions the Bank offers a much more qualified view of its position (World Bank 1995a: Ch. 12). The alternative is the ‘institutionalist’ view associated with the work of the ILO. In the case of the former, such labour market interventions as minimum wage legislation, mandated contributions to social security, job security legislations, large-scale unionization and collective bargaining impair

Labour market institutions and economic performance

63

the growth process through a variety of routes. These interventions, while ‘. . . intended to raise welfare and reduce exploitation . . . actually work to raise the cost of labour . . . and reduce labour demand . . . and labour incomes where most of the poor are found’ (World Bank 1990: 63; ILO 1991a: 5). On the other hand, there are claims that ‘. . . over the long run suppression of free industrial relations jeopardizes prospects for economic development’ and that there is a ‘. . . need to re-regulate the labour market’ (ILO 1991b: 65).

Labour market institutions as impediments to growth: the ‘distortionist’ model In order to appreciate the significance of this debate and its relevance to South Asia, it is necessary to offer a more detailed exposition of the alternative perspectives noted above. Consider the distortionist view which interprets organized labour as the source of both market failure and government failure. Trade unions represent monopoly imperfections in labour markets. They also form part of protectionseeking distributional coalitions. Indeed, some models of trade union behaviour perceive them as ‘insiders’ primarily interested in seeking benefits for employed members and unconcerned about the interests of ‘outsiders’ (i.e. unemployed, new job-seekers) (Carruth and Oswald 1987). Apart from unions, minimum wage legislation and job security regulations may also cause unemployment by creating wage rigidities. In the context of developing economies, such institutional variables are primarily responsible for the existence of a formal sector consisting of a white collar labour market with fixed wage and an informal sector consisting of blue collar low-paid workers with flexible wage. In other words, sectoral wage differentials are higher in the presence, rather than the absence, of labour market institutions. It is also alleged that organized labour leads to restrictive practices that impede job flexibility, constrain the capacity of management to cope with external shocks and retard technological innovation. The net effect is to impede dynamic efficiency. It also follows that labour market rigidities impair international competitiveness. By increasing labour costs above market-clearing levels and by retarding productivity, high union density, minimum wage legislation and related regulations lead to adverse shifts in unit labour costs (i.e. nominal wages adjusted by productivity), a standard measure of trends in international competitiveness. More importantly, pro-labour legislation can offset the salutary effects on export competitiveness that can be generated by exchange rate policy. Thus, for example, devaluations typically enhance export competitiveness by engineering a fall in real wages. This presupposes the absence of real wage resistance by workers – an assumption that may not be valid in the presence of strong unions and wage indexation. If the regulatory framework does not allow the unfettered operation of the labour market and leads to adverse consequences on competitiveness through multiple channels, does this mean that coercive labour legislation (e.g. ban on unions, organized industrial action, elimination of minimum wage legislation and job

64

South Asian economic development

security regulations, etc.) is the necessary price that industrializing economies have to pay? One can detect an intriguing, but unintended, convergence of views on this issue between scholars who are advocates of the distortionist model and radical scholars who oppose coercive legislation – or ‘labour subordination’ as they prefer to call it – on ideological grounds but accept the economic logic behind it. Representative examples include Deyo et al. (1987) and Frobel et al. (1980), although it must be noted that in a later contribution Deyo (1989) adopts a rather more circumspect view on the labour subordination hypothesis. Despite this caveat, the observation that ‘. . . foreign and local investors have an especially strong interest in low wages . . . in labour peace and a minimum of union interference in managerial autonomy’ (Deyo 1987: 46) captures the spirit of the radical position which maintains that state-imposed labour discipline is vital to the success of export-oriented industrialization. Such an argument is largely inseparable from the position taken by Bhagwati (1986), an eminent economist steeped in the neo-classical tradition and presumably a natural ally of the distortionist model. Bhagwati (1986: 100), drawing on the experience of the East Asian NIEs, accepts the point that ‘. . . authoritarian methods to keep trade union wage demands under control . . .’ can pay substantial dividends in the form of low inflation and general macroeconomic stability.

Labour market institutions: the institutionalist perspective, political economy considerations and a more eclectic paradigm One problem with the distortionist model is that it represents selective use of economic theory and ignores, or abstracts from, the point that unemployment or an inefficiently low volume of employment (relative to the full employment norm) may emerge even in the absence of labour market distortions. Thus, it is well known that employers may pay workers efficiency wages (i.e. wages above the market-clearing norm) in order to reduce labour turnover and enhance labour productivity. It is also important to appreciate the links between product market imperfections and labour market regulations – a point that is analysed at some length in the next section. It is worth remembering too that in developing economies with labour surplus conditions, interventionist labour market policies probably have limited impact. It is difficult to sustain the argument that non-union and union labour would be imperfect substitutes in the presence of an abundant supply of low-skilled workers. This would in turn act as a natural constraint on the market power of organized labour. Similar considerations allow one to understand why it is relatively easy to circumvent minimum wage and other employment regulations in labour-surplus economies. The institutionalist view does not simply rely on a critique of the distortionist model. It tries to go beyond this position and develop an alternative framework for analysing the appropriate role of the labour market in economic development. The institutionalist view probably has not enjoyed much popularity among the community of economists and academic scholars. It deserves greater attention. Standing depicts this as a school of thought that interprets

Labour market institutions and economic performance

65

. . . unions as a source of ‘dynamic efficiency’, obliging enterprises to pay efficiency wages rather than ‘market clearing’ wages and inducing management to raise productivity by technological innovations and cost-saving practices rather than reliance on low-cost labour. (1992: 327) Sengenberger (1991: 249) makes a very similar point when he argues that labour standards and other legally mandated benefits create pressures on employers to ‘. . . overcome the misguided preoccupation with cost-cutting . . . and (focus) attention to the strengthening of productive power (via training, technical innovation etc.)’. One could also invoke the notion of market failure in justifying labour market interventions. Such interventions – in the form of, say, mandated benefits or minimum standards for labour training – could be seen as producing positive externalities that cannot be internalized by firms. Hence, profit-maximizing employers do not provide such socially desirable benefits. Labour market interventions in such a situation could be regarded as one possible response to market failure rather than undesirable microeconomic distortions. The argument that that key labour market institutions, such as unions, can play a productive role in economic development is not merely confined to the work of the ILO. A variant of the institutionalist hypothesis is the voice/exit model of Freeman and Medoff (1984). Unions can provide a voice through which workers can air any grievances. The weakness or absence of unions may induce workers to take the exit option, leading to an increase in labour turnover. Higher labour turnover in turn impedes firm productivity. Pencavel, in a careful review of the role of unions in economic development, reaches a conclusion that is similar in spirit to the institutionalist perspective: . . . [U]nions have the potential to help raise productivity in the workplace by participating with management in search of better ways of organizing production. It is important for workers also not to feel alienated from the economic and social system and to believe they have a stake in it. Process matters: even if outcomes were identical, employees value the fact that they or their agents help to shape their working environment. (1995: 23) Nelson (1991) emphasizes that if trade unions are structured as peak associations within a framework of democratic corporatism then evidence from Europe shows that one can achieve the twin blessings of low inflation and low unemployment. A theoretical rationale can be provided in terms of game theory. A well-known result from such an analytical framework is that if bargaining partners (e.g. the government, peak employers and workers associations) have long-term time horizons induced by repeated strategic interaction, they may arrive at co-operative solutions (e.g. collective wage restraint in the face of external shocks) that are able to take account of societal interest at the expense of sectional interests. Such a rationale

66

South Asian economic development

resonates with Axelrod’s (1984) theory of the evolution of co-operation in a context of repeated ‘prisoner’s dilemma’ games. One should, as Freeman (1993: 135–9) emphasizes, take account of a range of political economy considerations when interpreting the appropriate role of the labour market in economic development. The concept of corporatism noted above is part of this repertoire of political economy arguments. The point is that the exercise of inclusive politics where organized labour is given access to the policymaking process as part of a tripartite dialogue between government, business and labour may engender responsible unionism. Beyond this, there are other ways in which organized labour can play a productive role in the political management of economic policies. It is now widely recognized that policymakers trying to implement a structural adjustment package (e.g. trade liberalization, macroeconomic stabilization, etc.) need political support to sustain this programme. One way of engendering such support is to provide compensatory labour market measures (e.g. severance pay, job re-training, etc.) in order to enhance the capacity of workers to cope in the post-reform phase. Other possibilities include ownership rights of workers through profit-sharing in public sector enterprises undergoing privatization as a means of reducing resistance to privatization. Finally, organized labour can contribute to the effective implementation of a structural adjustment package by offering feedback to the government on their social and income distribution effects – a point emphasized by Birdsall (1994: 442).

Labour market institutions and policies: the South Asian experience The distortionist model appears to have been influential in the interpretation of the role of the labour market in economic development. This is typically done by comparing the labour market performance of East Asia with other developing economies. Thus, Adams and Davis, drawing on the work of Nugent (1991), Balassa (1988), Fields and Wan (1989), uphold the conventional wisdom that: . . . Asian labour markets are generally less regulated than in Latin America. While Latin American governments have often used wage regulations to promote different economic sectors, even when the result is wages above their market-clearing levels, East Asia has generally relied on market-determined wages and consequently kept costs down . . . and avoided the formation of entrenched labour groups. (1994: 22) The message that follows from Adams and Davis (1994) is clear. East Asia epitomizes the prescriptions of the distortionist model. The presence of a labour market relatively free of distortions constitutes one important reason why East Asia has consistently exhibited a superior performance compared to economies in other parts of the world.

Labour market institutions and economic performance

67

Table 6.1 Distortion index for South Asia in factor markets in the 1970s Country

Distortion index: interest rate

Distortion index: wages

Bangladesh India Pakistan Sri Lanka Korea Malaysia Thailand Indonesia

3 2 2 2 2 2 1 2

3 2 3 3 1 1 1 1

Source: Selected extracts from Agarwala (1983) Note 1=low; 2=medium; 3=high.

The unflattering comparisons of labour market performance between East Asia and Latin America can easily be extended to South Asia. Consider, for example, the pioneering work of Agarwala (1983) on the degree of distortions in factor markets, foreign exchange markets and product markets. Table 6.1 selectively reproduces the results compiled by Agarwal. Based on the distortion index as applied to factor markets (capital and labour markets), South Asia has ‘high’ to ‘medium’ distortion, while East Asia has ‘low’ to ‘medium’ distortion. Such a finding has inspired Lim (1994: 841) to suggest that ‘. . . factor pricing is more distorted in South Asian countries’. A detailed analysis of labour market structures in specific South Asian countries provides interesting clues to the nature of labour market imperfections (World Bank 1995a). Thus, in the case of Sri Lanka, one can identify a regulated segment (approximately 25 per cent of the workforce) that includes government, public enterprises and some medium and large enterprises. In this regulated segment workers receive numerous wage and non-wage benefits, the latter primarily manifesting itself in the form of generous pension privileges. The primary labour legislation that governs job security is the Termination of Employment Workmen Act (TEWA). It entails large severance payments and restrains firms from laying off workers without the prior written approval of the Commissioner of Labour. Pencavel (1995: 2–3) extends this type of labour market regulation to include India and Bangladesh and characterizes them as ‘patronage regimes’. In such regimes: . . . [C]ollective bargaining is explicitly endorsed as a proper system for organizing labour markets and the state facilitates the unionization of new enterprises . . . Firms are often required to pay substantial severance pay to workers laid off from their jobs, there are mandatory employer-financed fringe benefits, and firms may not close their plants without government permission. (1995: 2–3)

68

South Asian economic development

Pencavel’s observations on India have been confirmed by other studies, such as Lucas (1986), Fallon (1986), and Fallon and Lucas (1991). In the case of Bangladesh, the study by Mondol (1992) fits the Pencavel framework. Another way in which one can uphold the view that labour markets in South Asia are more regulated than their East Asian counterparts is to offer a cross-country comparison of the ratifications of basic ILO conventions pertaining to forced labour, discrimination, child labour and employment policy. The rationale is that countries that seek to uphold a broad range of ILO-mandated conventions need to develop local regulations and mechanisms that enable governments to intervene in labour markets. Table 6.2 suggests that (as recorded at 1994) the total number of ratifications in South Asia range from 31 (Bangladesh) to 36 (India). In selected East Asian economies, the corresponding numbers range from 4 (South Korea) to 21 (Singapore). It seems, based at least on some indicators, that South Asian labour markets are more regulated than their East Asian counterparts. This in turn has been blamed as a key reason behind such problems as high unemployment (typically in the 10–13 per cent range in the case of Sri Lanka) in some countries of the region (World Bank 1995a). The temptation is to suggest that reform of labour market institutions to enhance their flexibility along East Asian lines is worth considering. Indeed, structural adjustment programmes (SAP) initiated by the World Bank and IMF in South Asia have typically included labour market reform as part of the package. There are, however, various reasons why such an inference should be treated with caution. First, a careful scrutiny of the institutional features of the labour market in East Asia and more recent developments in the region suggest that the contrast can be overdrawn. Second, one must distinguish between the facade of regulation and actual enforcement. The cross-country evidence shows that labour markets are highly flexible despite overtly interventionist labour legislation. Third, labour market imperfections need to be seen in the context of product market imperfections. Unionized firms in a context of protection from domestic and international competition (as in the case of import substituting industrialization) will Table 6.2 Ratification of basic ILO conventions (as at 1994) Country

Total number of ratifications

Bangladesh India Pakistan Sri Lanka Indonesia Korea Malaysia Singapore Thailand

31 36 31 33 10 4 11 21 11

Source: ILO (1995)

Labour market institutions and economic performance

69

behave rather differently compared with product markets exposed to both domestic and international competition. Finally, seeking to emulate East Asian-style labour markets, particularly as they prevailed during the take-off stage of industrialization in such polices as Taiwan and South Korea, entails an avoidable infringement of human rights. All these caveats deserve amplification. Consider the recent labour market developments in Korea and Taiwan. Both countries have witnessed waves of industrial unrest (following the political liberalization of the late 1980s) that enabled them to break away from a historicallyentrenched tradition of strict controls on the labour movement. The role and power of unions in the two countries have now been substantially enhanced (Galenson 1992). A study of recent changes in labour legislation in Korea show that in some respects it exceeds mandated ILO standards (Korea Focus 1995). Indeed, there is now a controversial move in Korea to deregulate the labour market and make it more flexible (Korea Focus 1997). In Southeast Asia, Malaysia has been conspicuous for banning unions in the export-oriented, FDI-dependent electronics sector, but it agreed to allow unionization in 1988 (Standing 1992: 329). Minimum wage legislations exist in Thailand and Indonesia and have recently been increased (Islam and Chowdhury 1997). Union densities are not necessarily lower in East Asia compared with South Asia. Frenkel (1993), for example, estimates union densities at 17 per cent in Singapore, 19 per cent in Hong Kong, 33 per cent in Taiwan, 24 per cent in South Korea, 14 per cent in Malaysia and 6 per cent in Thailand. In Pakistan and India union densities are below 10 per cent (World Bank 1995a: 82), although in the case of the latter Joshi and Little (1994) suggest a higher figure. If one considers union wage differentials as an indicator of a regulated labour market, East Asia does not turn out to be an outlier. Thus, in Malaysia, the union wage premium is in the order of 15–20 per cent compared with 10 per cent in Mexico and 5–20 per cent in the developed economies of the USA, UK and Germany (World Bank 1995b: 81). In the case of South Asia, Little et al. (1987) found evidence in India of widening differentials of wages across firm size, but only a part of this differential can be explained by union influences. It has not been possible to identify comparable evidence for the rest of the region, although in the case of Sri Lanka, Fields (1986) makes the point that unions do not seem to be effective in the wage determination process. In sum, there is no clear evidence that South Asian labour markets generate union-influenced wage premiums that are above East Asian benchmarks. Consider now the important distinction that one needs to make between the facade of regulation and its enforcement. As noted, in the presence of labour surplus conditions and the small size of the formal wage sector, vast segments of the labour market in developing economies remain unregulated or at least enforcement of labour legislation becomes rather difficult. In South Asia, the size of the formal wage sector (as measured between 1986 and 1992) is quite small in Bangladesh (2 per cent) and India (3.7 per cent). It is moderate in Pakistan (13.8 per cent) and Sri Lanka (13.1 per cent) (ILO 1995). This means that well over 80

70

South Asian economic development

per cent of the workforce can be found in activities – both in rural and urban areas – that fall outside the pale of formal regulation. Even in the formal wage sector, employers have found various ways in which they can circumvent stiff labour legislation. Edgren (1989) highlights the case of India, where such circumvention has occurred by, for example, paying workers to voluntarily quit and ensuring non-compliance with existing regulation without breaking the law! It is this gap between appearance and reality that partly explains why crosscountry evidence – assembled by Freeman (1993) – indicates a relatively high degree of real wage flexibility even in countries with apparently highly regulated labour markets. In fact, in many cases real wages actually fell and failed to keep up with the growth of per capita GDP. Does South Asia follow this cross-country trend discovered by Freeman? Table 6.3 provides data on the behaviour of agricultural and manufacturing wages in South Asia for the 1960–90 period. Two features stand out. First, real wages seem to have fallen in Bangladesh and Sri Lanka (the latter in the agricultural sector), although in the case of India, Joshi and Little (1994: 29) highlight evidence of particular periods where real wages fell by as much as 12 per cent in the manufacturing sector and 17 per cent in the agricultural sector. Second, real wages have grown below the growth in per capita GDP with exception of Pakistan, where manufacturing wages have apparently grown above the rate of growth of GDP. This admittedly crude and aggregate measure of real wage trends suggests that, despite both institutional and anecdotal evidence of a regulated labour market, the actual functioning of such a market does not show clear evidence of real wage inflexibility. Even in cases of sustained increases of real wages, there may well have been episodes of high variability of real wages (as in India). The need to appreciate the link between labour market imperfections and product market imperfections is also crucial in understanding the South Asian experience. Product market imperfections arise primarily through state-sanctioned entry and exit barriers that afford a high degree of protection to firms in many industries. This has taken several forms: import protection through the route of import substituting industrialization; industrial licensing; and state-owned enterprises with monopoly or near-monopoly status. When product markets are imperfect, it creates an incentive structure in which both organized labour and employers engage in rent-sharing mechanisms either by dissipating excess profits or by extracting subsidies from the state. Such a line of analysis suggests that the inefficiencies that Table 6.3 Behaviour of real wages in South Asia (%) Country

Period

GDP per capita

Wages agriculture

Period

GDP per capita

Wages manufacture

Bangladesh India Pakistan Sri Lanka

1960–91 1960–90 1970–92 1980–90

0.81 1.93 2.32 2.96

–0.73 1.82 2.94 –1.06

1976–89 1963–90 1963–88 1966–90

0.74 1.94 3.00 2.91

–1.05 1.74 4.89 1.03

Source: World Bank (1995b)

Labour market institutions and economic performance

71

one ascribes to labour market regulations are a reflection of deep-rooted protection of domestic industries. Such an approach also suggests an obvious solution to labour market rigidities: creating a greater degree of competition in product markets through a combination of trade liberalization, domestic deregulation and privatization. Suggestive evidence that this policy approach works can be found in South Asia. In the case of Sri Lanka, Rodrigo (1983) draws attention to the fact that the industrial and political power of the trade unions declined substantially after 1977, reflecting the impact of the economic liberalization efforts at the time. It is important to emphasize that, while organized labour apparently seems to lose out in such a strategy, the beneficiary is the average worker. Based on a sample size of 37 countries and observations spread over 1970–90, one can find a correlation between real wage growth (approximately 3 per cent a year) and greater exposure of the domestic economy to international competition (as measured by export–GNP ratios). In other words, the greater the degree of export orientation (which is an aggregate proxy for product market competition), the greater the degree of real wage growth (World Bank 1995b: 5). Even if one accepts the fact that South Asian labour markets work by default (because of lack of enforceability of labour standards) and even if one acknowledges that creating a competitive product market represents one solution to labour market rigidities, can one still mount a case for East Asian-style suppression of unions or at least a system in which the state co-opts the labour movement? The weight of theory and evidence now suggests that this approach represents a misreading of the East Asian experience and represents an avoidable infringement of human rights. One often overlooks the fact that the attempt to control the labour movement in East Asia had political motives – a point highlighted by Deyo (1989). Certainly, in the East Asian NIEs, the initial phase of coercive legislation had political origins because of the perceived association of organized labour with communist dissidents. Furthermore, several commentators (e.g. Lee 1984; Manning and Pang 1990; Addison and Demery 1987) note that there is no evidence that the East Asian economies have deliberately tried to suppress wages in the export-oriented sectors in order to maintain and prolong their competitive advantage in labour-intensive manufacturing. In other words, suppression or control of the union movement did not entail attempts to regulate the wage determination process. A more positive reason why attempts to control the labour movement are misguided stems from studies that actually demonstrate the productive role that unions can play. Thus, Freeman (1993: 134) highlights the fact that ‘. . . extant studies reject the claim that unions are a general impediment to macro adjustments or to enterprise performance in developing countries, although they may be so in particular cases’. Standing (1992) represents one of the very few studies that tries to test the role of unions in affecting enterprise performance using firm-level data generated from a large-scale 1988 survey of Malaysian establishments. He arrives at the following conclusions on the relationship between unionization and labour market outcomes:

72 • • • •

South Asian economic development Unionized firms were more likely to engage in training and thus improve worker productivity. Product innovations and work re-organization were much more prevalent in unionized firms. There appears to be a positive correlation between the unionization and labour productivity. There is no clear-cut evidence that unions represent a source of employment rigidity.

In sum, there is a case for rejecting the view that coercive labour legislation to remove or alleviate distortions in the labour market is the necessary price to pay for rapid industrialization. Such legislation probably represents an avoidable infringement of human rights. These ideas are now ratified by the World Bank, which is often perceived to be an advocate of the distortionist view. Thus the Bank observes (1995b: 86): ‘Denial of workers’ rights is not necessary to achieve growth of incomes. It is possible to identify the conditions and policies under which free trade unions can advance rather than impede development’. What are these ‘conditions’? One of them has already been identified. If product markets are competitive, organized labour loses its capacity to impose deleterious effects on the economy, but the average worker gains. Another point to note is that unions work best when they face incentives to focus on the workplace. An unfortunate feature of labour regimes in South Asia – particularly in Bangladesh and India – is that unions become highly politicized. They are more concerned with cultivating their political affiliations than dealing with enterprise-level issues (Pencavel 1995; Bardhan 1988). The results are invariably deleterious, as a study on Bangladesh by Mondol (1992) demonstrates. The regime of Hussain Muhammad Ershad in Bangladesh in the 1980s, in seeking the political support of the union movement, ended up granting unsustainable public sector wage increases, severance pay and non-wage benefits. A viable and desirable alternative to breaking this unfortunate link between union and politics is to develop a regulatory framework that encourages decentralized bargaining between independent, politically non-affiliated unions (based on voluntary membership) and firms. The discussion so far has focused on policies pertaining to the collective bargaining process that primarily affect wages and working conditions in the formal wage sector. What about the large majority of workers in rural and informal areas who often work under hazardous and insecure conditions? What about such issues as health and safety standards, gender discrimination and child labour? To begin with, one has to accept the harsh fact that South Asian economies, in common with other developing economies, lack enforcement capacities and have scarce administrative capabilities that undermine the effectiveness of well-intended protective labour legislation. Furthermore, workers themselves are not aware of existing labour standards. In Bangladesh, for example, a survey of female workers in the garment industry revealed that most were not aware that they were entitled to maternity leave (Chowdhury and Mazumdar 1991; Rahman 1995). Even if

Labour market institutions and economic performance

73

workers are aware of employers’ neglect of government-legislated standards, they are prepared to accept such neglect as the price to pay for a renumerative formal sector job. Any policy initiative to improve wages and working conditions in the informal sector must therefore start with the acceptance of the constraints noted above. Fortunately, economic logic and evidence suggests that general purpose policies have favourable side effects on labour standards. Thus, public actions that aim to enhance the provision of safe drinking water, improve sanitary conditions or eradicate infectious diseases feed into an improved working environment for the rural and informal sector workers. In the case of child labour, measures that improve access to education (e.g. construction of schools closer to children’s homes) and reduce the cost of schooling can go some way towards alleviating the worst forms of child labour – as the experience of the Indian state of Kerala has shown (Boyden and Myers 1994). In the case of gender discrimination, efforts to improve female education and enhance access to productive employment opportunities can have a bigger impact on the living standards of women than elaborate, but inadequately enforced, equal pay legislation. A good example is the case of the export-driven garment industry in Bangladesh – a notable success story. Ninety per cent of the workers are female. Evidence also reveals that women in this industry are better educated and receive on-the-job training (Khan 1993; UNDP 1994). Within the framework of general purpose policies, there is still a role for government-legislated labour standards and the ratification of ILO conventions. At the very least, they have symbolic value. However, governments in South Asia, mindful of their limited enforcement capacities, should work imaginatively to improve the effectiveness of labour standards. One mechanism is to engage in widespread dissemination of information on minimum labour standards, particularly pertaining to health and safety, child labour and gender discrimination, as a means of creating community awareness of these issues. In the area of monitoring and compliance, public officials can work closely with labour unions and other civic organizations whose activities can supplement the watchdog functions of the government.

Concluding comments The notion that labour market inflexibilities are a characteristic feature of South Asian economies is well-entrenched among many practitioners. Whether this has led to real wage inflexibilities cannot be demonstrated, at least at the aggregate level. This can be regarded as an outcome by default simply because there is a conspicuous gap between regulation and reality. The vast majority of the workforce in South Asian economies is engaged in activities outside the pale of regulation. Admittedly, one can describe labour institutions as ‘patronage regimes’ in South Asia and legitimate concerns have been raised about the political affiliations of trade unions. The solution is not to engage in East Asian-style coercive legislation, but to re-focus the attention of unions to the workplace. Both theory and evidence suggest that unions can be a productive force when they face the appropriate incentives. More generally, South Asian governments should refrain from adopting an

74

South Asian economic development

overly legislative approach towards labour market issues. A lot can be achieved through fostering greater competition in the product market through general purpose policies that impinge on human development and by working closely with unions and civic organizations in raising community awareness on appropriate labour standards. This message is quite distinct and richer than the distortionist model that entails an uncritical embrace of a fully deregulated labour market as the panacea for enhancing the welfare of workers in South Asia.

Further readings Herath, G. and Sharma, K. (2007) ILO (2004)

7

The Millennium Development Goals (MDGs) and the achievements to 2005

It is well known that Southeast, East and South Asia carry more than half of the total population of the world. The latest developments suggest that all the countries studied in this chapter (China, Indonesia, the Philippines, Thailand, Vietnam, India, Pakistan, Bangladesh, Nepal and Sri Lanka) are now populated by more than three billion people. More precisely, the figure was 3.4 billion in 2005 (see Table 7.1). Demographically, therefore, Southeast, East and South Asia is one of the critical and alarming regions of the world. By world standard, except China (due to single child policy), the region is characterized by very high rates of population growth, high density and high dependency. The major objective of this chapter is to investigate the achievements and the non-achievements in meeting important targets of the Millennium Development Goals (MDGs) in Asia in the period of 2000–05 and what prospects are in the future up to 2015, the terminal year for achieving the MDGs. In order to investigate such an issue, it is important first to clearly understand the population and demographic issues of the countries under study. The reasons for analysing the demographic dynamics (see Chapter 4) are to demonstrate the effect of the population problem in the course of achieving Table 7.1 Demographic conditions Country

Area (in ’000 sq. km)

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

9,597 1,919 300 514 330 3,287 796 144 147 66

Population (million)

Growth rate

Rural/total population (%)

1990

2005

2015

1990–2005

2005–15

1990

2005

1,135 178 61 55 66 849.5 108 104 19.1 17

1,305 221 83 64 83 1,095 156 142 27 20

1,378 244 99 69 92 1,248.5 190.5 168 32.7 21

0.9 1.4 2.0 1.1 1.5 1.4 2.4 2.1 2.3 1.0

0.5 1.0 1.7 0.7 1.0 1.0 2.0 1.7 1.9 0.7

70.6 69.4 51.2 70.6 79.7 74.5 69.4 80.2 91.1 82.8

59.6 51.9 37.2 67.7 73.6 71.3 65.1 74.9 84.2 84.9

Sources: Human Development Indicators (2004); FAOSTAT: World Bank (2004, 2007); http:// www.infoplease.com/ipa/A0004379.html

76

South Asian economic development

MDGs. Also, it shows how serious the population factor is, as a constraint to achieving MDGs. The attempt is made, first, to outline the general demographic situation in Asia. Next, an analysis on achieving MDGs is attempted against the backdrop of the population dynamics of the regions.

The demographic conditions and trends Table 7.1 shows that in 2005 the population of all the countries under study had almost half of the world’s total. Average population growth rate for Southeast and East Asia over 1990–2005 was 1.21 per cent, whereas for China alone it was about 1 per cent. Among the Southeast and East Asian nations, the Philippines had the highest rate of growth (2 per cent) and the Vietnam had the highest density per square kilometre (268). In South Asia, the highest rate of growth has been witnessed by Pakistan (2.4 per cent) and Bangladesh had the highest density of population (1,090 per sq. km). Table 7.2 provides further disaggregated estimates on population and land use in Southeast, East and South Asian nations under study. The populations of the Philippines and Vietnam have doubled over the period 1975–2005. China, Thailand and Indonesia’s populations over the same period increased by more than one and a half times (World Bank 2007). Density of population in 2005 per square kilometre was very high in Vietnam (>250) and moderately high in China, Indonesia, Thailand and the Philippines. Land use in arable category in 2005 was highest in Thailand (27.7 per cent) and lowest in China (11.1 per cent) out of total surface land of these nations. In South Asia, the population has doubled in almost all the countries Table 7.2 Population estimates and land use Country

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

Population density (in per sq. km)

Land use

1995 2005

1990

126 101 230 113 201 283 163 833 149 273

140 122 240 126 268 368 202 1,090 190 304

2005

Arable land hectare/100 people

Arable land (% of total)

Arable land hectare/100 people

Arable land (% of total)

8.1 10.3 7.4 25.6 8.2 15.5 15.2 6.1 9.4 4.7

11.1 11.2 18.4 34.2 16.4 54.8 26.6 70.2 16.0 13.5

8.0 10.6 7.1 22.4 8.0 14.8 14.1 5.7 8.9 4.8

11.1 12.7 19.1 27.7 21.3 53.7 27.6 61.9 16.5 14.2

Source: Human Development Report (2004); FAOSTAT: World Bank-World Development Indicators (2004, 2007)

MDGs and the achievements to 2005

77

studied, except Sri Lanka, during the last 30 years. Arable land use in 2005 was highest in Bangladesh (61.9 per cent) and lowest in Sri Lanka (14.2 per cent).

Population distribution Distribution of population by age group and dependency ratio by country are presented in Table 7.3. Recently (2005), in Southeast and East Asia, children in the age group 0–14 years constituted the second largest proportion of the total population of each country. In 1996, this proportion was very high for all the countries. In 2004, this ranged from less than 25 per cent in China and Thailand to above 29 per cent in Vietnam, Indonesia and the Philippines. The high proportion in Vietnam, Indonesia and the Philippines reduced the overall proportion of those in the working age group (15–64 years). The overall figures, however, suggest that the fertility rate in all these countries has declined over the last ten years. The issue of fertility rate is illustrated further in a subsequent section. In South Asia, the number of children below 14 years is highest in Pakistan (38.3 per cent) and lowest in Sri Lanka (24.1 per cent). A reduced fertility rate also helped reduce the population in South Asia. Dependency ratio =

Persons 0–14 + 65 & above Persons 15–64

 1000

(7.1)

In Table 7.3, the dependency ratio explains that children (aged 0–14 years) and older people (65 and above) constitute the dependency load for persons in the primary working ages (15–64 years). The dependency ratios provided in Table 7.3 reveal that the Philippines have the highest ratio of dependency of 720 and 660 (per 1,000) respectively in 1996 and in 2005 among the countries studied in Southeast and East Asia. However, dependency has declined for all the countries. Table 7.3 Distribution of population by age and dependence ratio 1996–2005 Country

Age group

Dependence ratio

1996

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

2005

0–14

15–64

65+

0–14

15–64

65+

27.2 32.2 38.4 26.2 36.0 42.3 45.5 42.3 — 31.7

66.5 64.0 58.1 68.2 58.5 60.2 51.1 56.8 — 64.2

6.3 3.8 3.5 5.6 5.5 4.0 3.4 0.9 — 4.1

21.4 28.3 35.1 23.8 29.5 32.1 38.3 35.5 39.0 24.1

71.0 66.2 61.0 69.1 65.0 62.7 57.9 60.9 57.3 68.6

7.6 5.5 3.9 7.1 5.4 5.3 3.8 3.6 3.7 7.3

1996

2005

500 560 720 470 710 662 966 762 — 545

400 500 700 400 600 600 800 700 800 500

Sources: US Bureau of the Census, International Data Base, http://www.census.gov/ cgi-bin/ipc/idbagg; Hossain, Islam and Kibria (1999); World Bank (2007)

78

South Asian economic development

Table 7.4 Labour force participation rates, by sector 1980–2004 Country

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

1979–81

2004

Agriculture

Other

Agriculture

Other

74 58 52 71 73 62 47 59 — 49

26 42 48 29 27 38 53 41 — 51

65 47 38 55 67 — 50.5 52 — 36

35 53 62 45 33 — 49.5 48 — 64

Sources: FAOSTAT: World Bank-World Development Indicators (2004); World Bank (2007)

In South Asia, dependency reduced in all the countries over the period of 1996–2005. The highest dependency was in Pakistan and Nepal (800 per 1,000) in 2005. Table 7.4 presents the labour force participation rates for the Asian countries studied by sectors between 1979 and 2004. Under ‘other’ category, the figures mainly show combined participation in the industrial and services sectors. The figures for all the countries in 1979–81 suggest that the agricultural sector was the major source of labour force utilization. This picture radically changed for every country in 2004, however, the changes were prominent for Thailand, China, Indonesia and Sri Lanka.

Female labour force participation In recent years, development literature has been flooded with studies on female participation in development in developing countries. In the early 1990s, UN agencies undertook numerous studies on women and their role in future development of developing countries. Women’s participation in a country’s labour force is one of the important indicators which measure the role of women in development. Table 7.5 presents detailed comparative information on female labour force participation for a sample of ten countries of Southeast, East and South Asia over 1990 and 2005. Almost half of the Vietnamese and Thai labour force was made up of women in 2005. In China and the Philippines they constitute more than 40 per cent. In all the countries in East Asia except Thailand, female participation has been increasing since 1990. Thailand seems to be decreasing slightly over the last two decades (by a few percentage points). In South Asia, the female labour force participation is highest in Nepal (40.5 per cent) and lowest in Pakistan (27 per cent). The participation rate in India is marginally higher than in Pakistan. However, like Thailand, Sri Lankan and Bangladesh’s participation rates experienced a drop between 1990 and 2005.

MDGs and the achievements to 2005

79

Table 7.5 Female labour force 1990–2005 Country

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

Total labour force (millions)

Female labour force (% of total labour force)

1990

2005

1990

2005

650 75.3 23.4 30.4 31.3 335.1 35.2 46.9 7.1 7.3

776 107 37 36 44 435 56.5 63.9 10.5 8.4

44.8 38.4 36.6 46.6 48.3 29.9 23.3 40.2 37.9 34.8

45 38 40 46 49 28.4 27.0 36.9 40.5 30.4

Sources: http://genderstats.worldbank.org; World Bank (2007)

Asia’s demographic challenges By 2005, Southeast and East Asia’s population reached more than 1.5 billion as compared to 1.2 billion in 1975. World Bank (2004) projections suggest that by 2015, the total population of the region will reach close to 2 billion. It is a somewhat less alarming picture than in the other regions of Asia, as far as the population densities are concerned. In 2005, Vietnam’s population density per square kilometre reached almost 300 persons, while China had 140, Indonesia had 122, the Philippines had 240 and Thailand had 126. By 2015, South Asia’s population will reach 1.7 billion. In terms of density of population in 2005, while Nepal (190 per sq. km), Pakistan (202), Sri Lanka (302) and India (368) have tolerable density, Bangladesh is certainly in a challenging position (1,090 per sq. km). The policymakers are concerned due to the fact that the contraceptive prevalence has not been increasing substantially in the populous nations of the regions. For example, between 1995 and 2005, this in fact declined from 90 to 87 per cent of women aged between 15 and 49 in China. It remained unchanged in Thailand (72 per cent) in the same age group (see Table 7.6). This development certainly would not help in reducing the growth rate of population in the region as predicted by the World Bank. South Asia’s challenges are even greater in controlling population in the future. The contraceptive prevalence rate is very low between the age group 15–49 years. In Sri Lanka only, this is equal to other Southeast and East Asian nations. In terms of reduction in fertility rate, the South Asia region has a major job in catching up with Southeast and East Asia in the future.

Achievements in MDGs in 2000–05 In this section an attempt is made, given the conditions in population growth in Southeast, East and South Asia, to investigate how the countries studied cope

80

South Asian economic development

Table 7.6 Fertility and contraceptive use rates 2000–05 Country

China Indonesia Philippines Thailand Vietnam India Pakistan Bangladesh Nepal Sri Lanka

Total fertility rate (birth per woman)

Contraceptive prevalence (% of women aged 15–49)

1990

2005

1995

2000–05

2.1 3.1 4.3 2.2 3.6 3.8 5.8 4.3 5.1 2.5

1.8 2.3 3.2 1.9 1.8 2.8 4.1 3.0 3.5 1.9

90 55 48 72 75 43 12 46 — 62

87 57 69 72 77 47 28 58 38 70

Sources: http://genderstats.worldbank.org; Global Population Profile (2002), USAID; World Bank (2007); http://www.infoplease.com/ipa/A0004379.html; http://www.census.gov/cgibin/ipc/idbagg

with their commitments in achieving MDGs by 2015. The investigation is carried out by analysing the achievements between 2000 and 2005, the first five years of implementing the MDGs strategy. In terms of eradicating extreme poverty, certainly Southeast and East Asian nations are ahead of South Asia (see Table 7.7). The headcount ratio suggests that more than one-third of the population in Bangladesh and India live with or under US$1 a day. In this regard, there was an improvement in rest of the nations after 1998. The improvement has been strong in all the nations except Indonesia and Thailand (no change) and India (only 2.5 per cent drop). The achievements have been praiseworthy although in South Asia there remains huge poverty in absolute Table 7.7 Eradication of extreme poverty Region

Poverty (US$1 a day headcount ratio (%))

Share of consumption to poorest quintile (%)

1998

2005

2005

East Asia China Indonesia Philippines Thailand Vietnam

16.6 7.5 15.5 <2 —

9.9 7.5 10.5 <2 —

4.7 8.4 5.4 6.3 9.0

South Asia Bangladesh India Nepal Pakistan Sri Lanka

41.3 36.0 41.8 28.6 15.0

36.0 33.5 24.1 17.0 5.6

9.0 8.9 6.0 9.3 8.3

Sources: World Bank (2006, 2007)

MDGs and the achievements to 2005

81

Table 7.8 Achieving universal primary education and promoting gender equality Region

Primary education completion (%)

Ratio of girls to boys in primary and secondary school (%)

1991

2005

2005

East Asia China Indonesia Philippines Thailand Vietnam

103 91 86 — —

98 101 98 82 98

99 98 102 98 103

South Asia Bangladesh India Nepal Pakistan Sri Lanka

49 68 51 — 97

77 89 76 63 —

106 88 90 98 102

Sources: World Bank (2006, 2007)

terms. Taking share of consumption by the poor into consideration, the poor in China, the Philippines and Thailand relatively have the lowest consumption share, compared to Indonesia and Vietnam, among Southeast and East Asian nations. In South Asia, Nepal is placed in this category. It is disturbing to see that the populous nations of Southeast, East and South Asia (China, Indonesia, the Philippines, Bangladesh and India), in population density terms, have been making slow progress in eradicating absolute poverty. In China and the Philippines, one-tenth of the population lived in poverty in 2005 and in Bangladesh and India, about one-third lived in poverty. The achievements in universal primary education and the promotion of gender equality as targets of the MDGs are presented in Table 7.8. By 2005, the Southeast and East Asian nations were ahead and have made strong progress since 1991. The progress in South Asia, however, is moderate. This suggests that Thailand and Pakistan need further investment in the primary education sector in order to catch up with rest of the nations. Table 7.9 presents the child mortality rate and the maternal mortality ratio of the two regions. As far as child mortality is concerned, there was strong achievement made in all the nations. However, the South Asian nations, except Sri Lanka, experienced in absolute terms a high mortality rate before 2005. This is also true in the case of maternal mortality until 2000.

Concluding comments Among the five targets of MDGs analysed for Southeast, East and South Asia regions, it is the poverty eradication target which appears to be lagging behind compared to the expectations at the time of the Millennium Declaration in 2000.

82

South Asian economic development

Table 7.9 Reducing child mortality and improving maternal health Region

Child morality (<5 morality rate per 1,000)

Maternal morality ratio (per 100,000 live birth)

1990

2005

2000

East Asia China Indonesia Philippines Thailand Vietnam

49 91 62 37 53

27 36 33 21 19

31 230 200 44 130

South Asia Bangladesh India Nepal Pakistan Sri Lanka

105 123 145 130 32

89 74 74 99 14

380 540 740 160 92

Sources: World Bank (2006, 2007)

There are many reasons. However, the above analyses suggest that the continuing pressure from population remains one of the major hurdles in eradicating poverty. The populous nations of these regions have been falling behind the other nations in achieving this target. China, Indonesia and the Philippines have almost 10 per cent of their population living in acute poverty (below US$1 a day). In absolute terms, this is about 150 million people. It is worse in South Asia. The South Asian populous nations (India and Bangladesh) carry a burden of more than 35 per cent of their people living in acute poverty. In absolute terms, this is more than 400 million people. If these nations keep growing without taking income distribution (equity) issues into consideration, it will be impossible to cut poverty by half by 2015.

8

Macroeconomic management in the era of the information revolution

This chapter deals with the macroeconomic management of the four South Asian economies studied. The objective is to see how these economies are doing on the macroeconomic front under the present era of information revolution. Macroeconomic treatment of the selected countries with specific major macro indicators over time will provide an understanding about the overall economic performance of the countries and will also focus their achievements and nonachievements in economic development in the early twenty-first century. The analysis is conducted with an open economy trade-dependent framework. All four economies fall within the categories of trade-dependent and open economy structures. The analysis on the macroeconomy of the four countries helps to identify the right macroeconomic balance and policies.

Money supply, inflation and growth of output A major issue addressed here is the relationship between inflation and monetary expansion over time. The issue of monetary expansion and inflation for an economy is important for various reasons. The most important among them is aggregate domestic savings affected by the rapid expansion of money for deficit financing. It is well established in the literature that a growing public sector or fiscal deficit has repercussions on private savings and investment, as well as on current account balance. The extent of the public sector deficit managed through monetary expansion in turn affects the adjustments on the above three macro variables. It is, therefore, money supply which plays a major role in determining these variables for an economy. It is in the deficit-financing environment that monetary policy assumes a greater role in the macroeconomic management of South Asian nations (Raghavan 1990; Frain 2004). The major objective of the monetary policy is to ensure supply of liquidity in the economy to satisfy the demand for money arising mainly from the transactions demand of both producers and consumers. An economy, however, suffers from inflationary pressure at a point where the money supply significantly exceeds the growth in real output. The undesirable inflation pressures take their toll in various ways, particularly making the economy suffer from a regime of low investment and high consumption, thereby reducing the level of domestic savings. Inflation also

84

South Asian economic development

Table 8.1 Trends in inflation rates, GDP growth and monetary expansion in selected countries Country

Bangladesh India Pakistan Sri Lanka

Inflation (annual % change)

Average rate of growth (GDP in %)

Money supply (annual % growth)

1990

1996

2006

1990

1998

2006

1990

1998

2006

10.7 9 7 12.4

5.5 10.1 11.5 10.2

7.2 5.4 9.1 10.0

4.1 5.8 6.2 3.9

4.3 5.6 6.1 4.2

6.0 9.2 7.8 8.0

10.4 15.1 11.6 19.9

— — — —

17.2 15.6 16.5 19

Sources: http://www.imf.org/external/pubs; World Bank (2007); http://www.unescap.org/ stat/data/apif/results_ind_print.asp?xorder

adversely affects the purchasing power of the low-income group of a nation. The South Asian nations are not exceptions to the above consequences of monetary policy. Table 8.1 summarizes the trends in inflation rate, output growth and monetary expansion in four countries. Table 8.1 establishes that there is a close correlation between inflation and monetary expansion, on the one hand, and inflation and the growth in output, on the other hand. Table 8.1 shows in recent years (2006) that Bangladesh has been experiencing a moderate level of inflation together with a fairly high level of money supply and a moderate GDP growth compared to 1990. In the case of India, the results were same except that the rate of growth was very high (9.2 per cent) in 2006 compared to 1990. This was mainly due to this nation’s economic reform measures and the fact that information economy reforms commenced in early 1990s. For Pakistan, it is evident that the economy has been suffering from high inflation, low growth and high money supply. Since the 9/11 and the subsequent war in Afghanistan and Iraq until now, the Pakistan economy had major adverse effects. The political uncertainty with Pakistan’s neighbours in the western front has not been subsiding in recent years. The political crisis and civil war that ravaged Sri Lanka over the last three decades brought down the nation to its knees and, as a result, inflation remains high, with a corresponding, relatively moderate rate of growth with high money supply. The above analysis makes one point clear: it appears that there is a feedback between money supply and prices as well as money supply and output growth in these countries.

Exchange rate policy The exchange rate regime and the related issues are important yardsticks of measuring macroeconomic management in order to strive for economic development. The exchange rate policies can exert a powerful role in managing the balance of payments instrument of an economy. In South Asia, historically, at least two exchange rate regimes existed between the nations. All the nations have been governed by pegged (fixed) rate in the past. Since the mid-1990s, all the nations have

Macroeconomic management

85

Table 8.2 Exchange rates 1988–2008 (in national currencies per US$) Currency

1988

1991

1995

1997

2008

Bangladesh India Pakistan Sri Lanka

31.7 13.9 18 31.8

36.6 22.7 23.8 41.4

40 32.4 31.6 51.3

43.9 36.3 41.1 59

68 43 67 105

Sources: www.adb.org/documents/Book/key_indicators/2003/pdf; World Bank (2007)

gradually embraced flexible rate regime. However, under the flexible regime, all the nations have closely followed the directions and conditions imposed by the IMF for borrowing from the Fund in recent years. Table 8.2 presents a detailed picture of the currency fluctuations of various currencies of the South Asian nations. The evidence is presented in nominal terms, capturing the movements in relation to the US dollar, although it is recognized that such information may not adequately capture movements in real exchange rate terms. Table 8.2 captures the movement in nominal exchange rates since 1988. The trends in depreciation in nominal exchange rates are estimated for the period between 1998 and 2008 in Table 8.3. The nominal exchange rate in relation to the US dollar has depreciated by more than 200 per cent in Bangladesh in the ten years between 1998 and 2008. During the same period, India experienced 300 per cent depreciation. The currencies of Pakistan and Sri Lanka experienced a depreciation of 370 and 330 per cent respectively for this period. In terms of comparison by country, it suggests that, over the

Table 8.3 Trends in depreciation in nominal exchange rates in relation to US$ in South Asia Country

Period

Annual rate of depreciation/appreciation (%)

Bangladesh

1989–93 1995–96 1997–98 1998–2008 1989–93 1995–85 1997–98 1998–2008 1988–93 1995–96 1997–98 1998–2008 1998–93 1995–96 1997–98 1998–2008

–4.5 –4.5 –20 –213 –17.2 –7.5 –20 –307 –7.7 –11.1 –50 –372 –8.5 –7.6 –62 –330

India

Pakistan

Sri Lanka

Sources: Calculated from Table 9.2 (negative sign reflects depreciation); World Bank (2007)

86

South Asian economic development

ten years between 1998 and 2008, Pakistan’s Rupee depreciated with a high magnitude (372 per cent). This is followed by Sri Lanka (330 per cent). The currencies of India and Bangladesh depreciated by 213 and 307 per cent respectively.

External sector The current account as a macroeconomic indicator mainly provides a picture of an economy’s performance in the external sector. The trade balance (i.e. exports and imports difference at a particular point of time) shows the economy’s direction and effects of its macro management to achieve the desired goals. The yardsticks of measuring the trade balance and performance of an economy in the external sector are of two types: current account deficit as a percentage of GDP and the trade deficit as a percentage of GDP. This text relates with deficit instead of surplus ratios because the South Asian nations expected to carry deficits. Here, it is the magnitude of deficit historically which matters more than analysing the ways of abolishing the deficits. Table 8.4 provides a clear picture about the trade deficit/surplus in four countries over time. The trade deficit/surplus of all countries studied has been fluctuating wildly over time. In the ten years between 1995 and 2005, Bangladesh’s deficit declined from

Table 8.4 Trends in external trade and trade balance (annual change, % of GDP) Country

Exports

Imports

Trade balance deficit

Current account deficit

Bangladesh 1985 1990 1995 2005

6.5 6.3 9.6 17

19.6 16.3 16.0 23

13.1 10.1 6.4 6.0

8.1 3.3 0.9 .003

India 1985 1990 1995 2005

4.9 4.7 8.2 21

8.1 7.1 8.6 24

3.2 2.4 0.4 3.0

1.3 2.4 0.5 .01

Pakistan 1985 1990 1995 2005

8.9 10.4 13.9 15

18.6 16.0 21 20

9.7 5.6 7.1 5.0

3.9 3.4 5.6 .03

Sri Lanka 1985 1990 1995 2005

22.6 20.4 31 34

36.6 31.1 42.2 46

14 10.7 11.2 12.0

7.6 5.9 5.9 .03

Sources: www.adb.org/documents/Book/key_indicators/2003/pdf; World Bank (2007)

Macroeconomic management

87

Table 8.5 Ratios of export to imports (%) Country

1985

1990

1995

2005

Bangladesh India Pakistan Sri Lanka

33.2 60.5 47.8 61.7

38.7 66.2 65.0 65.6

76.0 90.0 65.0 60.0

60.0 88.0 65.0 78.0

Sources: www.adb.org/documents/Book/key_indicators/2003/pdf; World Bank (2007)

0.9 per cent of GDP to 0.003 per cent. The same was experienced in India, however, the percentage declined from almost 0.5 per cent of GDP to 0.01 per cent during this period. Pakistan and Sri Lanka’s deficit in 2005 was 0.03 per cent of GDP. Table 8.5 shows the ratios of exports to imports from 1985. On this, India and Sri Lanka have recently (2005) come out very strongly. Pakistan remained almost the same over the last ten years, while Bangladesh fell behind in export terms over the last ten years. The changes in current account ratios over time provide a picture of a country’s external debt situation in that period. The final issue under analysis in this chapter is each country’s external debt position between 1987 and 2005. The ratio of external debt to GDP is often used as an indicator to assess a country’s capacity to generate income in order to meet outstanding debt-servicing capacity. In percentage terms, Table 8.6 shows a clear picture of debt by all the countries. Out of all the nations studied, in the ten years from 1996 to 2006, only India’s debts increased out of proportion. The increase was about 25 per cent. It must, however, may be mentioned that these figures do not provide a meaningful measure for external indebtedness or the consequences of a large amount of debt in macroeconomic management. These are just indications of the situation of the debt level of each country and they provide information about the level of debt changes over time to show the need for external resources in servicing the current account deficit. However, to evaluate the economic implications of such a large dependence on external resources, it is necessary to investigate various other macroeconomic indicators of each nation such as debt–service ratio and the proportion of aid to the total external resources made available to individual countries. The credit worthiness of various countries is evaluated by the debt–service ratio. In other words, this shows the capacity of a country to service the interest and amortization of loans Table 8.6 Growth of external debt 1987–2006 (US$ billion) Country

1987

1993

1996

2006

Bangladesh India Pakistan Sri Lanka

8.85 40.78 13.21 5.2

15.7 99.0 17.4 7.9

17.6 96.5 23.1 8.6

18.94 123.12 33.68 11.45

Sources: www.adb.org/documents/Book/key_indicators/2003/pdf; World Bank (2007)

88

South Asian economic development

Table 8.7 Trends in the debt–service ratio 1985–2005 (% of exports) Country

1985

1990

1995

2005

Bangladesh India Pakistan Sri Lanka

12.7 17.3 17.8 11.8

25.8 31.9 10.2 13.8

9.8 27.1 23.2 8.7

5.4 — 40.3 4.5

Sources: www.adb.org/documents/Book/key_indicators/2003/pdf; World Bank (2007)

through earnings from exports of goods and services of the country. The aid share of the total external resource of a country is required to be known by the donors, whether the aid money is used for servicing the outstanding debt and current account deficit or to meet the basic needs of the poor people. Table 8.7 presents the trends in debt–service ratios over the last 20 years. This ratio has been within a comfortable reach to Bangladesh and Sri Lanka in 2005. The nation which is carrying a huge burden in debt–service terms is Pakistan. Among the nations studied, Pakistan has been utilizing more than 40 per cent of its export earnings for servicing debt. Bangladesh and Sri Lanka have been utilizing only 5 per cent of their export earnings for this purpose. India’s figures for recent years have not been available. However, in 1995, India utilized more than one-quarter of its export earnings for servicing debt. It is, of course, very hard to estimate the optimum level of a particular country’s borrowing, but an ever increasing debt–service ratio signals that a country’s drop in either export earnings or the rate of growth in borrowing has outpaced the rate of growth in export earnings. In both these terms, the country in question could prematurely step into major macroeconomic imbalance, a crisis which has been witnessed in Pakistan in recent years. Table 8.8 illustrates the Official Development Assistance (ODA) in the countries studied between 2000 and 2005. In per capita terms, the ODA has been stable in Bangladesh and slightly increased in India. In Pakistan, the ODA doubled Table 8.8 Official Development Assistance (ODA*) received (net disbursement) Country

Bangladesh India Pakistan Sri Lanka

Total (US$ million)

Per capita (US$)

Aid dependency ratio % of GNI

2000

2005

2000

2005

2000

2005

1,168 1,463 692 276

1,321 1,725 1,666 1,189

9.0 1.0 5.0 14.0

9.0 2.0 11.0 61.0

2.4 0.03 1.0 1.8

2.1 0.02 1.5 5.1

Sources: Human Development Report (2004); World Bank (2007) Note * ODA is defined as those concessional flows of resources which contains grant element of at least 25 per cent of flows under this category.

Macroeconomic management

89

and Sri Lanka experienced a phenomenal increase over 2000–05. However, the absolute value of the ODA was substantial for nations such as Sri Lanka, Pakistan and Bangladesh. All these nations attracted almost US$1.5 billion as ODA in 2005. Table 8.8 further suggests that the ODA money declined in Bangladesh and India as a percentage of GNI. Pakistan and Sri Lanka enjoyed higher assistance in 2005 than in 2000.

Managing the macroeconomy in the context of trade dependence and external indebtedness Finally, Table 8.9 summarizes the performance of the major fiscal indicators of four countries studied. The period considered is 1990–2005. In other words, this shows the fiscal performance of all the nations, mostly in early part of the twentyfirst century. The figures show that Bangladesh experienced a decline in its current account deficit and its fiscal deficit reduced to 0.7 per cent of the GDP in 2005. In the case of India, the figures suggest that the nation’s current account deficit declined over 1990 and 2005. It appears that the Indian economy suffered from an increased budget deficit in 2005. In Pakistan, both the current account and budget deficits declined over this period. Sri Lanka’s deficits in these terms also reduced over this period.

Concluding comments In view of the above, while the macroeconomic analysis earlier in this chapter shows an impressive recovery in almost all indicators in a macro sense, it unfortunately failed to impact on the bottom section of the income ladder. After almost Table 8.9 Fiscal indicators 1998–2005 (% of GDP) Country

Indicators

1990

1992

1995

2005

Bangladesh

Current Account/GDP Government Exp./GDP Total Revenue/GDP Budget balance/GDP Current Account/GDP Government Exp./GDP Total Revenue/GDP Budget balance/GDP Current Account/GDP Government Exp./GDP Total Revenue/GDP Budget balance/GDP Current Account/GDP Government Exp./GDP Total Revenue/GDP Budget balance/GDP

–1.9 17.1 9.3 –7.7 –2.4 16.1 16.6 –8.5 –4.2 25.9 18.6 –6.5 –3.8 25.9 21.4 –10.0

–0.8 16.8 10.6 –6.2 –2.4 17.4 15.6 –5.7 –4.2 26.5 19.1 –7.4 –4.7 26.9 20.2 –7.3

–3.0 9.1 12.0 –6.2 –1.7 14.5 12.3 –2.2 –6.5 19.1 17.2 –5.3 –3.7 26.0 20.4 –7.6

–.002 8.8 10.0 –0.7 –.01 15.8 12.5 –3.6 –.03 14.5 12.9 –3.2 –.03 21.0 16.1 –7.3

India

Pakistan

Sri Lanka

Sources: Asian Development Outlook (2004); World Bank (2007)

90

South Asian economic development

ten years of reasonable growth, the lowest 20 per cent of the population in the region has not been benefited as per the top deciles of the income group. Thus, it is premature to begin celebrating the recent macroeconomic successes of the region. Half of the population has yet to fully benefit from the growth which began almost ten years ago.

9

Economic reforms in South Asia

Implementation of the IMF- and World Bank-led structural adjustment programme (SAP) reached a peak via adjustment lending loans, extended by these agencies towards developing countries in the early 1980s. In South Asian developing countries this, however, has been behind by almost ten years compared to other regions. The SAP has brought a strong wave of economic reform process to the region. Particularly, the economic reform has been directed towards three major measures: trade liberalization, privatization and attracting foreign direct investment (FDI). In this chapter, all three measures are reviewed separately for each of the four nations of South Asia. It must, however, be emphasized that although these are separate issues, they work closely to make the overall economic reform process a success for developing countries. Therefore, it has been decided to focus on these issues separately in a single chapter.

Trade liberalization Trade liberalization as a concept and as a measure in developing countries has been extensively studied both outside and within the World Bank (Thomas and Associates 1991; Papageorgiou, et al. 1991). A large and growing literature on trade policy reforms and their consequences are surveyed by Rodrik (1993). All these studies within and outside the Bank have made at least one outcome of trade policy reform clear: many developing countries have been pursuing the reform process unilaterally. Bangladesh, India, Pakistan and Sri Lanka are not exceptions (Srinivasan and Canonero 1995). The South Asia pursued closed and inward-looking trade policies until the end of 1980s, but embraced the outward-oriented policies unilaterally by substantially bringing down the average tariff rate and removing many quantitative restrictions at the same time (Dean et al. 1994). Trade liberalization as a concept has been defined by various trade experts, however, the definitions by Krueger and Bhagwati seem universally accepted. Krueger (1986) defines liberalization as ‘any policy action that reduces the restrictiveness of controls – reduces the scarcity premium attached to those controls’. Krueger’s definition puts forward liberalization as a means of openness, that is transformation of a closed economy into an open one where controls are minimized and/or removed

92

South Asian economic development

altogether. Bhagwati emphasizes neutrality of the trade regimes as the central aspect of liberalization: Neutrality means the removal of any bias from import-substituting regime to favour domestic sale. There should not be any incentives against exports within a nation under a liberalized economy rather exporters should be allowed incentives to increase exports by way of rebate or reducing duties on imported inputs. (cited in Dean et al. 1994) The main areas of trade liberalization have been identified under the following major measures: • • • • • • • •

reduction of average nominal tariffs; reduction in the range of nominal and effective tariffs; shift from quantitative restrictions (QRs) to tariffs (tariffication); real devaluation of currency; unification of multiple exchange rates; removal of export taxes; removal of export quantitative restrictions; implementation of export subsidies, rebates or compensation schemes.

With all these measures in hand, it is, however, suggested that a developing country, to achieve a meaningful trade liberalization strategy, must transform QRs into tariffs first, and then gradually lower these tariffs and make them uniform. Direct incentives to exports have not been as important to export growth as real devaluation and import liberalization. At the same time, exporters’ access to imported inputs has been more important for export growth than internal export subsidies (Papageorgieu et al. 1991; Thomas et al. 1991). Liberalization in South Asia In the mid-1980s, all four South Asian countries still were following a strong import substituting strategy with a very high level of tariffs. Of the four countries, India and Pakistan had the highest duties. Prior to 1990, India’s basic rates ranged up to 335 per cent and Pakistan’s ranged as high as 450 per cent. Bangladesh’s average tariff rate was 94 per cent and Sri Lanka’s rate was only 25 per cent (Dean et al. 1994). Since 1990, the South Asian region has undertaken a drastic measure to reduce average rates of tariffs. Table 9.1 provides an account on the tariff reforms in the region. All four countries reduced tariff rates substantially since the reform process began in the pre-1990 period. With this measure, after almost 15 years of reform, the average nominal rate was brought down to only 15 per cent in South Asia, while this rate was 8 per cent in East Asian. The last column of Table 9.1 suggests the figures for weighted mean tariff (WMT) for both the regions. The WMT is the

Economic reforms in South Asia

93

Table 9.1 Tariff reform Country

Bangladesh (1989, 2005) India (1990, 2005) Pakistan (1987, 2005) Sri Lanka (1985, 2005) Average – South Asia Indonesia (1985, 2005) South Korea (1984, 2005) Thailand (1986, 2005) Malaysia (2005) Average – East Asia

Average Nominal Tariff

Weighted Mean Tariff

Pre-reform

Post-reform

2005

94 128 68.9 31 80.48 27 24 13 — 21.33

16.8 17.0 14.6 11.3 15.0 6.5 9.0 10.6 7.5 8.0

35.8 14.5 12.4 7.7 18.0 6.0 9.3 4.9 4.4 6.0

Sources: Dean et al. (1994); World Bank (2007)

average of effectively applied rates. This is measured by taking most favoured trading partners into account. The rates applied to these trading partners are weighted by the product import shares corresponding to each partner country (World Bank 2007). The effective rate remains at 18 per cent in South Asia in aggregate, whereas it was only 6 per cent in East Asia in 2005. Table 9.2 presents the most recent nominal tariff in disaggregated form for primary and manufactured products. The nominal tariffs for primary products are larger than manufactured products in all the countries under study except Pakistan. In Pakistan, the tariff barrier on primary products is almost 1 per cent less than manufactured products. Intra-nation comparison for rest of the nations suggests that primary producers are still enjoying almost one-fourth of their domestic prices protected by tariff. Inter-nation comparison suggests that India has the highest protection (24.4 per cent) in primary products among the four nations, while Bangladesh has highest protection (16 per cent) in manufactured products. Prior to the reform measures, in South Asia, all countries except Sri Lanka practiced a very extensive and elaborate quantitative restriction system. The existence of some of these QRs has more significantly contributed to restraining trade than the high tariffs, which prevailed in the past. Sri Lanka reduced the already relatively small number of items still subject to licensing requirements. The other three countries (especially Bangladesh) made large reductions in the coverage of QRs. Table 9.2 Nominal tariff barriers in primary and manufactured products 2005 Country

Primary products (%)

Manufactured products (%)

Bangladesh India Pakistan Sri Lanka

21.8 24.4 13.8 18.2

16.0 15.9 14.6 10.3

Source: World Bank (2007)

94

South Asian economic development

Table 9.3 Quantitative restriction coverage (% of total production) Country

Pre-reform

Post-reform

QR ratio

Bangladesh (1989, 1992) India (1990, 1993) Pakistan (1987, 1990) Sri Lanka (1985, 1992) Indonesia (1985, 1990) South Korea (1984, 1992) Thailand Malaysia

40 95 65 neg 30 20 neg neg

10 50 30 neg 10 5 neg neg

0.25 0.53 0.46 — 0.33 0.25 — —

Source: Dean et al. (1994) Note neg = negligible.

However, in the two most restrictive regimes (India and Pakistan), QRs still cover about one-half and one-third of domestic production, respectively (see Table 9.3). The table also suggests that the coverage of quantitative restrictions in East Asia is very low and Sri Lanka and Bangladesh only match the figures of East Asian countries. So far, the restrictive regimes of South Asia have been concentrating on fixing the trade controls in terms of reducing high tariff rates and removing quantitative restrictions. They have also made some efforts to remove the barriers against exporters and devalue the respective currencies to a large degree since the reform processes have began in 1990. The process is, however, very slow by any standard. This is mainly due to the lack of effective administrative and bureaucrative infrastructure available to the hands of implementing agencies of the region.

Privatization The industrial policy issues in developing countries were not only affected by the trade liberalization strategies, but also by the privatization movement which was, once again, initiated by the World Bank and IMF through SAP. Like trade liberalization, the privatization agenda was endorsed for both more developed and developing countries alike. However, privatization in developing countries has so far experienced three major approaches for implementing the agenda. These are: the ‘big-bang’ approach of Latin American and Caribbean countries, the ‘go-slow and institutional’ approach of the Asian and East Asian countries and the ‘marketization’ political approach of the east European countries. These approaches have, of course, yielded different levels of impacts. In the South Asian region, the East Asian approach of go-slow and institutional has been followed so far. In the South Asian context, the issue of privatization means selling state-owned enterprises (SOEs) and other government activities to the private sector (Edadan 1997). To make this process proceed with a reasonable pace, all four countries in South Asia have independent government agencies in place. The subsequent

Economic reforms in South Asia

95

review on the privatization trends in South Asia and in East Asia provide a comparative picture about the shape and direction of privatization in these two regions. Privatization trends Privatization of SOEs has been carried out by using a large number of techniques. The most common practices are: direct sale of an SOE, public offer of an SOE, concession sale, joint venture, management buyouts, liquidation and lease. Table 9.4 provides the figures for privatization performance in the selected countries of South Asia and East Asia in 1994. In South Asia, Pakistan and Sri Lanka can be regarded as relatively high privatizor countries, India as the medium privatizor and Bangladesh as the low privatizor. In contrast, in East Asia, Malaysia is the high privatizor country, Indonesia is a medium privatizor and South Korea and Thailand are the low privatizors. In Pakistan, a Privatization Commission was established in 1993 to implement the government’s privatization agenda. By 1994, 67 state-owned enterprises had been divested and another 51 were at various stages of divesture (Kardar 1994). The major enterprises which were identified for divesture are presented in Table 9.5. In Sri Lanka, a Privatization Commission was established to oversee the restructuring and divesture of public manufacturing enterprises. By the end of 1993, the majority shareholdings of 35 state-owned enterprises had been divested and another 30 were in various stages of divesture (Dunham and Kelegama 1994a). In Bangladesh, a Privatization Board was established in 1993 to implement the government’s privatization agenda to provide SOEs to private hands. Among the four countries in South Asia, Bangladesh has been highly concentrated with SOEs. It has almost 92 per cent of its modern industries under state ownership. Privatization efforts in Bangladesh have been very slow among the four South Asian nations. Since 1991, the central government in India has introduced a programme of disinvestment of government shareholding in a wide range of public enterprises, bringing its share in a number of such enterprises to close to 60 per Table 9.4 Privatization performance 1994 Country

PR

GNP

PR/GNP

Bangladesh India Pakistan Sri Lanka Indonesia South Korea Malaysia Thailand

43 4,395 1,541 223 1,984 3,274 6,638 1,041

26,141 289,374 52,241 11,553 168,000 355,672 67,163 141,523

0.16 1.52 2.95 1.93 1.18 0.92 9.88 0.74

Source: Edadan (1997) Notes PR = Privatization Revenue (US$ million); GNP = Gross National Product (US$ million).

96

South Asian economic development Table 9.5 Pakistan’s privatization record 1994 Industry

Privatized

Under Privatization

Automobiles Cement Chemicals Fertilizer Engineering Vegetable oil Wholemeal plants Rice mills Miscellaneous units Total

7 9 6 1 6 16 13 7 2 67

4 6 8 6 6 9 1 1 10 51

Source: Kardar (1994)

cent. The central government of India has so far partially privatized the telecommunications and aviation industries. At state level, some states, such as Andhra Pradesh, Gujarat and Haryana, have in fact permitted the privatization of some sick public enterprises (UNIDO 1995). Industrial performance With trade liberalization and privatization strategy in place, the South Asian nations placed their economies on a sustainable growth era since the beginning of first half of the 1990s. A remarkable rebound of industrial activity in the region occurred in 1994, a year in which manufacturing value added (MVA) in the region grew by 6.4 per cent, almost twice that of GDP growth per capita for the same year. All four countries of the region recorded relatively high MVA growth rates, in the range of 5–7 per cent (see Table 9.6). However, given the size and level of modernization of the Indian economy, the Indian figures suggest a strong development in the industrial sector. The figures on industry-wide breakdown suggest that the growth in the food processing sector has been very impressive. The Indian food processing sector has grown by 7.5 per cent in 1994. This growth was due mainly to the changing lifestyle and spending pattern of the Indian middle class, coupled with increasing

Table 9.6 MVA growth rates and shares by country 1970–94 (%) Country

1970–80

1980–90

1990–2003

1994

Share in total MVA 1994

Bangladesh India Pakistan Sri Lanka

6.9 4.0 5.8 4.5

3.1 7.4 7.8 4.7

7.5 1.2 7.0 8.2

5.4 6.7 6.2 7.2

3.5 79.3 11.3 2.7

Source: UNIDO (1995)

Economic reforms in South Asia

97

urbanization and the entry of women in the labour force, which resulted in a rapid expansion of domestic demand for processed food. The capital goods industries also performed well. In 1994, the MVA growth rate was 8.4 per cent for nonelectrical machinery, 6.5 per cent for electrical machinery and 6 per cent for transport equipment. In India, there has been a rapid growth in the supply of electronic goods, especially computers. It has been reported that between 1985 and 1992, the estimated number of minicomputers and microcomputers increased from 7,500 to 200,000. The textile industry, which is one of the most important in the region, registered a modest growth. In 1994, the MVA growth rate stood at 5.2 per cent, which is well below the average. In contrast, wearing apparel was one of the fast-growing branches with a growth rate of 9.6 per cent (UNIDO 1994: 99–100). The industrial performance in the region, particularly in India, suggests that there is a clear shift of policies from adopting inward-looking to adopting outwardlooking strategy. If the present pace of reform can be continued and implemented effectively, the region is going to come out of the decades of slow growth and closed-door environment. It is not to say, however, that there will be no challenge ahead. The most immediate hurdle the region is facing is the major bottleneck on infrastructure availability, with the demand for infrastructure growing with every attempt at economic reform. Infrastructure bottleneck With the present pace of economic reform process in the region, it has been clearly observed that the region is unable to cope with the infrastructure facility it inherits. The facilities, in terms of access to electricity, highways and seaports, are in acute shortage. India, for example, has one of the lowest levels of per capita consumption of electricity in the world. Public sector has traditionally been responsible for the infrastructure development of the region. After considerable investment in the power and transport sectors in the past, the result has been mixed. For example, in the power sector, it has been claimed that in Andhra Pradesh some 22 per cent of the power is lost in the course of transmission and distribution as a result of both poor equipment and outright theft by employees and users. The unofficial figure for losses is near 50 per cent (The Economist 1995). This is not true only for Andhra Pradesh; it has been the same old story for all four countries in the region. The need to overcome infrastructural bottlenecks is becoming a critical issue for almost all countries in the region confronted with the demand for infrastructure in their towns and industrial areas. Any delays in the planned infrastructure projects will make countries in the region less competitive and might even hamper their economic growth prospects. To overcome these problems the region must explore the possibility of acquiring capital and investment from outside. The next section reviews such a future prospect.

98

South Asian economic development

Foreign direct investment Global overview Many prominent economists in the 1950s and 1960s subscribed to the notion that domestic industrialization primarily required a reliance on domestic resources and domestic markets, although supplementation through foreign aid was widely recognized. This notion was characterized by ‘export pessimism’ (Bhagwati 1984). To this, one should readily add that there was also a great deal of pessimism concerning the role that FDI could play in domestic industrialization and, more generally, in economic development. This was reflected in a circumspect and at times distrustful attitude towards foreign firms. This led in turn to a restrictive regulatory approach. It is well known that a handful of East Asian economies (Singapore, Hong Kong and Taiwan) deviated from this trend, but even here one can detect sharp regional differences, ranging from a rather liberal approach entailing an almost uncritical dependence on FDI – the so-called ‘Singapore model’ – to the more restrictive approach noted above – the so-called ‘Korean model’ (Hill 1990). Again among the East Asian nations, Korea’s FDI regime has been relatively rigid and constrictive, however, the recent IMF bailout programme obliges Korea to radically liberalize its policies in FDI. The global context of FDI regulation seems to have changed markedly in the 1990s as Behrman (1993), in his perceptive review of the 1993 World Investment Report compiled by the UNCTAD programme on transnational corporations, notes. Behrman (1993: 149) is inspired by the ‘. . . sea-change in host government policies towards FDI, which have now become wholly supportive and welcoming, as compared to the restrictions or rejections of the 1960s and 1970s’. The South Asian economies have not been immune to this FDI-friendly bandwagon effect – an issue that is re-visited at a later stage in this chapter. The key purveyors of FDI flows are, of course, multinational companies (MNCs) or transnational corporations (TNCs). A number of salient facts deserved to be noted. First, TNCs have become key decision makers in the integration of the world economy. Cross-border trade flows within TNCs now account for approximately 30 per cent of world and probably 15 per cent of GNP (World Bank 1995: 62–63). Second, the geographical distribution of FDI is heavily skewed. The landmark World Investment Report of 1993 (henceforth WIR 93) notes that at the beginning of the 1990s, developing countries held less than 10 per cent of the world’s stock of FDI. Among this group, ten countries held two-thirds of the FDI inflow to the developing world. Despite this, the impact of TNCs on the developing economies is highly significant, as the World Bank (1995: 62–63) emphasizes. Of the 170,000 affiliates of TNCs in the world, 40 per cent are in developing world and they directly employ 12 million workers. More importantly, 40 per cent of the new jobs created by TNCs worldwide between 1985 and 1992 were in the developing world. It needs to be emphasized too that TNCs account for more than 20 per cent of modern sector employment in a range of developing economies.

Economic reforms in South Asia

99

A more recent development is the link between privatization and FDI. A worldwide movement towards privatization, particularly of such key infrastructural services as telecommunications, has created new opportunities for foreign firms to participate in the industrialization process in developing economies. In 1989, privatization-related FDI in all developing economies was approximately US$198 million and rose to US$17,613 million by 1994 (UN 1996: Table 1.3, p. 6). In the case of South Asia, the absolute numbers have been quite small and there have been significant year-to-year fluctuations (Arun and Nixson 1997: 209). Nevertheless, the figures suggest that privatization-related FDI in South Asia was US$14.1 million, up from the rather modest benchmark value of US$0.2 million in 1989 (UN 1996: Table 1.3, p. 6). The implications of this new development in FDI flows for South Asia are spelt out in greater detail at a later stage in this chapter.

Understanding FDI: some theoretical perspectives One of the simplest ways to conceptualize FDI is to apply a conventional trade-theoretic framework. Thus, if variations in factor endowments drive trade between countries, the same variations drive FDI flows across the world. This implies that capital will move from areas where it is abundant (i.e. industrialized countries) to areas where it is scarce (i.e. developing countries), given that capital movements respond to differential opportunities in rates of return. In addition, many factors of production (e.g. natural resources and labour) are either immobile or insufficiently mobile. This allows FDI to take advantage of non-mobile (or insufficiently mobile) factors of production in different geographical locations. This framework also allows one to hold a positive view on the impact of FDI on economic development because labour-surplus, capital-scarce developing countries are able to augment their productivity through borrowed capital and the technology embedded in it. This simple conceptualization cannot be easily reconciled with the geographical distribution of FDI noted above. Thus, instead of a predicted pattern where FDI flows predominantly from rich to poor countries, one can detect a discernible concentration of FDI in developed countries and in a relatively small sample of developing countries. Can alternative theories and interpretations of FDI be of much assistance? Any review of FDI – even one as brief as this – will remain crucially incomplete if one does not acknowledge the relevance of the ‘product cycle’ theory that applies to both trade and investment (Vernon 1966). All products go through a cycle of birth, early development, maturity and decline. New and innovative products tend to originate in the industrialized countries. Other industrialized countries are usually the next users of the new products and direct investment typically takes place among these more developed countries. In the maturing and declining phases, production is more likely to move to the less developed countries, where costs are relatively low. A variation of this – known as the ‘flying geese’ model – is favoured by many Japanese economists (e.g. Ozawa 1992). The notion of a product cycle is accepted,

100

South Asian economic development

but its existence is seen primarily as an outcome of shifting comparative advantage. Thus, source countries that lose comparative advantage in the production of certain goods, such as textiles, relocate their production to host countries which have a comparative advantage in the production of such goods. This line of theorizing is also evident in the work of Balassa (1977). He advocates a ‘stages approach’ to comparative advantage. In the flying geese model, Japan is depicted as the lead goose, followed by other East Asian economies. In the post-Second World War period, Japanese industries have gone through a process of structural change. They started with first-tier, labour-intensive industries, such as textiles, graduated to second-tier segments, such as steel and shipbuilding, and moved on to the third-tier activities, such as motor vehicles, electronics and machine tools. Japanese firms are now firmly entrenched in the fourth-tier high-technology industries, such as biotechnology and superconductors. In the later stages of such structural change, some of these activities have been relocated by Japanese firms to the East Asian NIEs as well as Southeast Asia in response to shifting comparative advantage. The East Asian NIEs in turn have been transferring their labour-intensive activities to Southeast Asia and China. The product cycle approach – and its variant, the flying geese model – can be reconciled with certain aspects of the geographical distribution of FDI. The fact that the product cycle evolves slowly and the implication that the relatively rich countries are the primary recipients of FDI in the growth phase of the product cycle can shed some light on the positive correlation between FDI and per capita income that has been observed. The flying geese model is particularly useful in the interpretation of Japanese FDI in East Asia and intra-East Asian investment patterns. Drawing on the work of Bora (1996), ADB (1996: 196) notes that ‘. . . Japan has a strong bias towards investing in the East Asian region’. In addition, ‘. . . 50 per cent of the total stock of foreign direct capital originated in the region’. Similar evidence of intra-East Asian investment has been detected by others (e.g. Kwan 1996 and Matsui 1996). None of the theories or hypotheses discussed so far takes an explicit firmtheoretic approach. Dunning (1997) consistently writes on the need to adopt such an approach. He identifies, from previous works, three key driving forces behind FDI flows: • • •

ownership advantage or firm-specific advantage (FSAs); internalization advantage; and location-specific advantage.

Firms must have something of value to offer to others in international markets. This is represented by their FSAs. However, it is possible to engage in international markets via alternative modes: arm’s length transactions, such as exporting and licensing, or internalized transactions, such as setting up subsidiaries abroad through the act of FDI. If international firms prefer the latter to the former, then this revealed choice means that there is an internalization advantage. It follows that

Economic reforms in South Asia

101

while developing countries may have a location-specific advantage in the form of low wages, FDI inflows will not automatically occur in response to this attraction unless the other supporting factors (i.e. FSAs and internalization advantage) are present. However, it must be emphasized that the internalization/transaction cost school in FDI theory plays a very important role in explaining FDI inflows. The implication is that the smooth flow of FDI from capital-surplus countries to developing, capital-scarce countries is by no means obvious.

Understanding FDI: developing an appropriate policy framework The brief discussion of the various propositions on FDI (i.e. factor endowments, product cycle and the flying geese model and firm-theoretic considerations) has been geared towards gaining some understanding of the geographical distribution of FDI. The conclusion seems to be that factor endowments alone will not guarantee that developing countries will automatically be major recipients of FDI. A regional bias in FDI may well exist. Furthermore, location-specific advantage in the form of low wages is only one factor that drives FDI. Given this sombre prediction, what scope is there for public policy in developing countries for monitoring, attracting and regulating FDI? Two issues deserve clarification. First, should one aim for an interventionist policy which has a mix of investor-friendly packages and regulatory components designed to meet specific objectives (such as technology transfer)? Second, how appropriate is the notion that South Asia should, as in other areas, ‘look east’ in its attempt to attract FDI to the region? Special incentives to attract FDI are well-known practices in many countries. Prominent examples include tax holidays (either a significant reduction or a complete elimination of corporate taxes) for a specified period, provision of facilities in specified zones (such as export processing zones), a liberal industrial relations framework (such as a no unions policy) applied to export-processing zones where FDI is located and pioneer industry status where international firms receive preferential treatment if they invest in specific new industries designated by the government. Often, investor-friendly packages can be mixed with regulatory mechanisms. The aim is to screen foreign investors in terms of their ability to meet certain objectives prescribed by the host government. Examples include limits on profit repatriation, local content rules (such as a rule that specifies that 20 per cent of local inputs would have to be used in production processes), restrictions on foreign equity ownership (such as a prescription that specifies a limit of 50 per cent foreign ownership), limits on the number of expatriate personnel (particularly at supervisory and management level) that can be recruited by international firms, mandated training requirements and mandated research and development (R&D) requirements (such as prescriptions to perform certain research functions locally or to spend specified amounts locally on research). The attempt to combine incentives with restrictions often reflects an ambivalent attitude to FDI inflows: they can impose benefits as well as costs on the host

102

South Asian economic development

economy. Thus, governments in developing countries would readily acknowledge the benefits that a foreign investor brings: much-needed capital, technology, managerial expertise, business know-how, provision of local employment, access to foreign markets and contribution to government revenues through payments of taxes and tariffs. At the same time, such governments would express concerns on the imposition of likely costs: crowding out local firms, insufficient linkages with the rest of the economy, insufficient technology transfer, inappropriate products and technology and a general feeling of unease that the principles of national sovereignty and self-reliance are being compromised through a dependence on powerful corporate actors which ultimately owe their loyalty to their home country. If one can readily construct a cost/benefit balance sheet, then it follows that the appropriate goal of public policy is to harness FDI in a way that maximizes net benefits to the host economy. While one can readily sympathize with such an approach, a number of complications need to be considered. First, an interventionist FDI policy that advocates a judicious combination of incentives and restrictions assumes (either implicitly or explicitly) a high degree of bureaucratic capability in terms of integrity and honesty, technical knowledge and enforcement that simply may not exist in developing countries. Second, one can easily confuse cause and effect in constructing a cost/benefit balance sheet of FDI. Consider the following hypothetical scenario. A developing country has a highly skewed distribution of income, a distorted factor market characterized by heavily underpriced capital and a large domestic market heavily protected through a combination of tariff and non-tariff barriers. If international firms are lured to produce primarily for the domestic market under such a policy setting, the outcomes are likely to be precisely what critics of FDI point out: inappropriate products reflecting the skewed distribution of income, inappropriate technology and inadequate employment effects reflecting factor price distortions and considerable scope for abuse of market power by powerful corporate actors given a protected domestic market. This admittedly contrived example clearly shows that the typical costs that one associates with FDI reflect the domestic policy setting rather than innate inadequacies of international firms. One must concede that even in economies credited to have a domestic policy setting that is conducive to the development of an internationally competitive economy, the conclusions on the role that FDI plays in attaining specific social objectives are not always salutary. In East Asia, including China, it has been observed that, in the area of technology transfer, TNCs have not had the expected outcomes (as measured by training of local personnel, use of local subcontractors, R&D activities of affiliates of TNCs, etc.). In the case of China, one of the world’s largest recipients of FDI, Zhan (1993: 137) makes the sombre reflection that ‘. . . the overall results of efforts to promote the transfer of advanced technology through FDI have been somewhat unsatisfactory’. Enos (1989), in a wideranging survey of technology transfer in the Asia-Pacific region, reaches a similar conclusion. One must treat such findings with caution. The point is that TNCs cannot be expected to be vehicles of transfer of core technology. This is clearly implied by the

Economic reforms in South Asia

103

product cycle theory and its variants. The role of TNCs in the process of integrating developing economies with international markets is quite modest: they are efficient facilitators of the international division of labour in the sense that they enable developing economies to grow on the basis of borrowed, standardized technology. This means that the enforcing of local content rules and the enforcing of mandated training and R&D requirements on TNCs are probably too ambitious in terms of the goals that they set. In the absence of well-endowed human capital and wellspecified, properly enforced property rights, attempts to piggyback on FDI to the technology frontier are likely to falter. So far the discussion has focused on a critique of the regulatory and restrictive aspects of FDI policy. What about the uncritical embrace of FDI through the provision of special incentives? This seems to have gained in popularity in the 1990s after the heavy-handed regulatory approach of previous decades. Once again, one needs to be circumspect about the efficacy of investor-friendly packages. Empirical findings typically suggest that such packages do not seem to work well (Lim 1996). Special incentives can, at best, compensate for the weaknesses inherent in many developing economies. These weaknesses include an unstable macroeconomic climate, inadequate intellectual property protection, inadequate physical infrastructure and so forth. Furthermore, special incentives can be emulated: country X can try to out-bid country Y. In the resulting bidding war for designing the most attractive investor-friendly package, scarce fiscal and administrative resources can be easily wasted (see James et al. 1989: 131). If neither heavy-handed regulation of TNCs nor special incentives are likely to be particularly effective in harnessing the benefits of FDI for the host economy, what is left for public policy in this sphere? The answer is invariably unexciting and non-specific. It emphasizes broad principles and policy fundamentals. Such a prescription includes: • • • • • •

a stable and predictable macroeconomic climate; a well-functioning physical infrastructure; wide availability, at competitive wages, of a flexible and easily trainable workforce; well-specified and properly enforced property rights; a policy of uniform treatment of all firms, irrespective of nationality (the socalled ‘national treatment principle’); simple, effective and transparent regulatory mechanisms dealing with approval, monitoring and evaluation of FDI.

There could still be scope for specific interventions, but they can at best supplement, rather than supplant, the policy fundamentals noted.

‘Look East’ policy as a component of FDI policy For the purpose of this discussion, it is enough to note that South Asian policymakers are increasingly being exhorted to emulate East Asian economic success by

104

South Asian economic development

emulating their policies and strategies. This general prescription can also be applied to the sphere of FDI with a particular twist: South Asia should solicit FDI from East Asia. This has gained topicality, particularly after the recent emergence of Japan as a major source of both aid and FDI in Asia. Thus, Bhagwati (1993: 95–96), in his review of recent economic reforms in India, maintains that ‘. . . India can play a Japan card. Japanese aid and investment can be attracted both because there are no domestic difficulties in doing so and because Japan can be successfully lobbied to play such a role . . .’. What is the essence of this hypothesis? How credible is it? The ‘Japan card’ hypothesis rests on two planks. First, Japan’s presence in South Asia is politically acceptable because it does not suffer the liability of lingering and unpleasant memories of colonial domination as the Western nations do. This in turn means that Japanese investment can be seen as playing a useful countervailing role to US and European TNCs. Second, geopolitical realities are changing in ways that are creating a natural role for Japan. Thus, the United States is increasingly engaging its attention in South America, while the EU is understandably focusing its attention on Eastern Europe. This means that Japan is more likely to accommodate demands that play a more assertive role in Asia. While the notion of inculcating a conscious look-east policy in the domain of FDI appears seductive, one must highlight some pitfalls that surround such a perception. Note that in terms of FDI outflows, Japan seems to display a regional bias towards East Asia, despite the bitter memories of colonial rule in South Korea and Taiwan and despite the infamous, but short-lived, experiment with a Greater East Asia Co-Prosperity Sphere (GEACS) as a mechanism for extending Japanese hegemony in the region (Petri 1994). This implies that historical legacies are not necessarily a liability in the geographical distribution of FDI. Indeed, the reverse may be true. Historical links probably reinforce the current regional distribution of FDI. It needs to be noted too that FDI in East Asia is increasingly being made up of FDI from other East Asian, but non-Japanese, sources (see discussion above). This is a reflection of the flying geese pattern at work. There is no guarantee that this flying geese pattern will automatically extend to South Asia, although the catalytic role played by South Korean FDI in the garment industry in Bangladesh cannot be discounted (Rhee and Belot 1990). The implication clearly is that making a lookeast policy the cornerstone of FDI policy rests on tenuous grounds. Ultimately, one cannot avoid the difficult task of ensuring that the policy fundamentals exist to make the most of the obvious location-specific advantage that South Asian economies have to offer: cheap and plentiful supply of labour.

FDI in South Asia: recent developments and policy initiatives The need to harness FDI for economic development is increasingly going to be forced on South Asian economies. This stems from the fact that the composition of capital flows is changing markedly. UNDP highlights these changes quite emphatically:

Economic reforms in South Asia

105

Total capital flows to developing countries tripled between 1987 and 1994. The composition shifted markedly away from official development assistance (ODA) and towards private capital flows, which increased from 37 per cent of total flows to 76 per cent. In real terms, ODA fell between 1985 and 1993 by 9 per cent. (1996: 78) To what extent have the polities of the region responded to these changing realities? Among South Asian economies, Sri Lanka may be regarded as a pioneer in seeking to rely on FDI as a significant plank in its quest for industrialization. This was part of an overall ‘export-push’ policy that gathered momentum after 1977 (Athukorela and Jayasuriya 1994: 20–2; Ramanayake 1984). Of particular note was the setting up of a Greater Colombo Economic Commission that was responsible for the management of export-processing zones that would attract FDI. The incentives offered to international firms included 100 per cent foreign ownership of investment projects, a tax holiday of up to ten years on the salaries of expatriate employees, royalties, dividends and a duty exemption for imported inputs. Analysis of the available evidence shows the significant turnaround in FDI flows in Sri Lanka after 1977. Thus, from a situation where there was apparently disinvestment by foreign firms in the 1966–76 period, FDI jumped to US$33.8 million in the 1977–85 period (James et al. 1989: 123). The contrast with India is striking. Over the same period, FDI was either negative (in US$) or close to zero. Sadly, the policy shift after 1977 in Sri Lanka faltered badly, partly as a result of macroeconomic mismanagement (epitomized by an unsustainable public sector boom) and the rise of ethnic hostility in 1979, which reached crisis proportions in 1983 (Athukorela and Jayasuriya 1994). Despite this, Sri Lanka continues to maintain a commitment to FDI as an important plank in its export-oriented industrialization drive, as is reflected in its new phase of economic liberalization and adjustment that started in 1989 (World Bank 1995). Political uncertainties will, to a considerable extent, dictate future developments in this area. As the ADB (1996: 147) concludes: ‘Progress toward the achievement of peace in Sri Lanka will, to a great extent, determine the level of FDI that the country will receive’. To this one needs to add that Sri Lanka has to get its policy fundamentals right. Weak macroeconomic management has been the Achilles heel of the Sri Lankan economy. In addition, a predilection for public sector-driven development has meant that a credible commitment to privatization has not been maintained. As the subsequent discussion amplifies, the latter issue is of some significance as FDI can now be targeted for infrastructure development, an activity that has traditionally been the domain of the public sector. Unless macroeconomic stability is maintained and sustained, and unless the privatization movement gathers momentum, Sri Lanka’s desire to become the first export- and FDI-driven NIE of South Asia will be frustrated. In the case of the other South Asian economies (Bangladesh, India, Pakistan) an FDI policy as a central plank of export-driven development is a more recent phenomenon. Past performance in this area has been weak. India has been

106

South Asian economic development

traditionally distrustful of FDI and has preferred to use arm’s length transactions (e.g. licensing) to acquire foreign technology, but the approach has not been effective (James et al. 1989: 130). Bangladesh has a conspicuously poor record in attracting FDI. One study focuses on the 1989–93 period and makes the following disturbing observations: Bangladesh’s efforts, by offering various incentives, at attracting foreign direct investment has been weak . . . There has been an exodus of foreign companies . . . from Bangladesh over the past several years. The reasons mentioned . . . include poor law and order situation, political and policy uncertainty, disasterproneness of the country, underdeveloped infrastructure, bureaucratic and labour problems and stagnancy [sic] of the economy. (Ahmad 1994: 17) Trends in FDI inflows to South Asia since the mid-1990s suggest that there are grounds for optimism. Table 9.7 shows that, after falling between 1990 and 1991, FDI inflows to South Asia increased on a sustained basis between 1993 and 2005. Much of this reflects developments in India. Indeed, one could suggest that, relative to historical standards, India is experiencing an FDI boom. Bangladesh continues to be the laggard in this sphere, but it increased by many fold in 2005. Pakistan fares rather well. FDI inflows have increased quite significantly between 1990 and 2005. In the 1966–76 period, FDI inflows (US$ millions) were: –7.0 in India, and –0.5 in Sri Lanka. In the 1977–85 period, the corresponding figures were: 0.0 in India, 33.5 in Sri Lanka and 61.7 in Pakistan (James et al. 1989: Table 4.11, p. 123). One needs to re-visit the Indian and Pakistani experiences as the significant upswing in FDI inflows in the two countries appear to have coincided with major policy initiatives, but there are interesting differences in approach. Consider the case of India. Table 9.8 shows key changes in India’s regulatory framework with respect to inward FDI over the 1991–95 period. Two points need to be emphasized. First, the policy approach appears to emphasize a gradual reduction in entry barriers and rationalization of the regulatory framework (such as the adoption of the national treatment principle) rather than simply focusing on narrowly targeted incentives. Second, FDI is being targeted for infrastructure development, particularly in the Table 9.7 FDI flows to South Asia 1990–2005 (US$ million) Region

1990

1991

1993

1995

2005

Bangladesh India Pakistan Sri Lanka

3 165 244 43

1 148 257 448

4 344 335 195

125 1,750 639 195

802 6,598 2,183 272

Sources: ADB (1996, 1997); World Bank (2007)

Economic reforms in South Asia

107

Table 9.8 Key changes in India’s regulatory framework for FDI 1991–2005 1991 • Opening up of areas previously closed to foreign investors, including power generation • Establishment of Foreign Investment Promotion Board 1993 • Full ownership allowed in certain industries previously closed to or restricted for foreign investors • Adoption of the national treatment principle • Financial industry partially opened to FDI • Full convertibility of Rupee 1994 • Telecommunications industry opened to FDI • Mining industry opened to FDI 1995 • Cable television networks opened to FDI Source: Adapted from Arun and Nixson (1997: 210) which in turn draws on UN (1995: 61)

areas of power generation and telecommunications. In fact, these two sectors accounted for 41 per cent of FDI inflows between 1991 and 1995 (Arun and Nixson 1997: 217 drawing on Reserve Bank of India and Ministry of Industry reports). Infrastructure development has traditionally been the domain of the public sector. Decades of experience in the region have shown that the public sector has been a weak performer in this sphere. The quality of the service is poor, while the additions and improvements to infrastructure have simply failed to cope with the demands of industrialization (Far Eastern Economic Review 6 April 1995). Commentators generally agree that infrastructural bottlenecks represent a serious threat to industrialization in the region (UNIDO 1995: 102). Ironically, this has in turn been one factor in deterring FDI. Hence, targeting FDI for infrastructure development may be seen as a potentially promising case of hitting two targets with one instrument. In the case of Pakistan, the policy approach for attracting FDI appears to be much more conventional. Thus, there is a focus on designated industrial zones, protracted tax holidays (ten years), access to key duty-free imported inputs by foreign firms and so forth (UNIDO 1995: 102). While FDI inflows seem to have picked up, it is too early to say whether this reflects a vindication of the conventional, incentives-based approach to FDI policy. One needs to emphasize that FDI policy in Pakistan appears to be conflated with other objectives. Thus, the industrial zones targeted for FDI are to be ‘. . . set up in underdeveloped areas in the provinces of Baluchistan, Punjab, the North-West Frontier and Sind, as well as Azad Kashmir and the north of Kashmir bordering China’ (UNIDO 1995: 102). Regional development is admittedly a desirable social goal, but it is by no means

108

South Asian economic development

clear that wooing FDI in bureaucratically-determined regional zones is the most efficient way of achieving it. This reflects an insufficient understanding of the factors that drive FDI inflows and their impact on the host economy.

Concluding comments This chapter started with two guiding principles of industrial policy in South Asia. First, the focus should shift from inward-oriented industrialization to exportdriven development. Second, the focus should shift from public sector-driven industrialization to an environment in which industrialization is led by the private sector. This observation applies in particular to the provision of such infrastructural services as telecommunications and power generation, which have traditionally been perceived as the domain of the public sector. FDI fits in with these guiding principles. There is no compelling economic logic why private firms that participate in export-driven industrialization have to be domestically owned. Similarly, one cannot construct a persuasive economic rationale to support the view that privatization of infrastructural services must be led by nationally-owned firms. South Asian economies have made modest progress towards export-oriented industrialization. Obviously, as recent trends in protectionism suggest, a lot more needs to be done. A similar verdict of modest and faltering progress can be made in the case of privatization. In the sphere of FDI policy, there clearly is a perceptible shift in the region towards harnessing FDI for economic development. This remains a challenging task. FDI inflows seem to respond to prior evidence of success. If capital-scarce, labour-abundant economies are seen as bad bets because of lack of such fundamentals as macroeconomic and political stability, then private capital flows will simply bypass them. To suggest that one can lure FDI through a tailor-made package of incentives or to make the seductive point that one can court Japanese FDI as an alternative to FDI from traditional sources, such as USA and Western Europe, simply masks the fundamental task of getting the policy fundamentals right. One needs to reiterate the point that protection, privatization and FDI need to be linked together as part of an integrated approach to industrial policy. A credible commitment to reduced protection through a comprehensive programme of trade liberalization, shedding any reluctance that the commanding heights of the economy (e.g. power generation, telecommunications, banking, roads and ports, etc.) cannot (at least partially) be foreign-owned. Ensuring a stable, predictable macroeconomic climate can go a long way towards making South Asian economies investor-friendly. There are promising signs that the region is at last recognizing the benefits that are embedded in such a policy approach.

Further readings Das, K. C. (2008) Panagariya, A. (2003) Bhagwati, J. and Panagariya, A. (eds) (1996)

10 Trade and economic integration

Industrialization and trade prospects in South Asian nations will not only be influenced by their attempt at stabilization and the SAP policies, but also by the changes in the external environment they face and their policy adjustments to those changes. The principal external environments which need to be watched closely are: economic growth, inflation and interest rates of industrial countries, world commodity prices, international capital flows and world trade. Issues in international trade and economic integration are investigated in this chapter. The objective of this investigation is to show what prospects the South Asian nations have for expanding their current trade and to integrate the region with the world economy and within the region in the first quarter of the twentyfirst century. World merchandise trade (exports and imports) has increased phenomenally in recent years. It has been estimated that an increase between 8 and 9 per cent was witnessed in late 1990s. This is compared to only about a 4 per cent increase during the early 1990s because most of the industrial nations were in recession in this period (World Bank 1995). However, it is the service sector which promises a faster growth because of higher flows of FDI in this sector and the growth of long-distance services. These optimistic forecasts have been based on six major factors: • • • • • •

economic recovery witnessed in industrial countries over 1995–96; appreciation of Yen and further opening up of Japanese market; higher world prices for primary products (which contribute to the increased purchasing power of primary exporters); a faster growth witnessed in developing countries in the long run; world capital market integration; further acceleration in trade liberalization both in developed and developing countries.

While the above factors were articulated in the late 1990s at the World Bank, things have changed in recent years with respect to the global financial crisis that started in the US in 2008. The crisis has now contaminated Europe and Asia, including Japan. Under the present circumstances (2008), it is expected that the optimistic forecasts mentioned above are unlikely to materialize – at least not before 2010.

110

South Asian economic development

Table 10.1 Trends in South and East Asia’s trade integration (%) Country

Output growth

Trade growth*

1971 to 1980

1981 to 1990

1991 to 1996

South Asia Bangladesh India Pakistan Sri Lanka

5.8 3.7 5.2 4.3

4.1 5.8 6.2 3.9

East Asia Indonesia Malaysia South Korea Thailand

7.7 7.8 9.0 7.9

5.5 5.2 8.8 7.9

Speed of integration**

1971 to 1980

1981 to 1990

1991 to 1996

1971 to 1980

1981 to 1990

1991 to 1996

4.5 5.4 5.8 5.7

0.7 7.0 9.1 6.5

11.5 11.6 9.1 8.3

26.6 22.3 18.3 28.9

5.1 3.3 3.9 2.2

7.4 5.8 2.9 4.4

22.1 16.9 12.5 23.2

7.2 8.6 6.6 7.3

20.2 8.5 35.1 13.4

7.1 18.1 23.3 25.5

23.8 36.3 27.5 31.0

12.5 0.7 26.1 5.5

1.6 12.9 14.5 17.6

16.6 27.7 20.9 23.7

Sources: Tables 2.1 and 2.4 Note * growth rate of sum of merchandise exports and imports volume; ** growth rate of trade minus growth rate of output.

South Asia’s integration with the world economy in terms of trade can be measured as the ratio of trade to GDP and the speed of integration can be measured from the growth rate of trade and the growth rate of output. Table 10.1 shows the figures for speed of integration by four South and East Asian nations. All four countries in the region have been integrating with the world economy at a very fast rate. Table 10.1 also suggests that the East Asian economies of South Korea and Indonesia began integrating with the world economy in the 1970s and their recent rates of integration have been moderate (except in Malaysia). Of these two regions, Malaysia and Sri Lanka are by far the most integrated nations. Table 10.2 presents the picture of integration of South Asian four nations under study during the years 2000 and 2005. India certainly has been integrating at a faster rate than any other nation in the region. Its rate is also greater than any other decade in the past. Bangladesh has been lagging behind compared to its speed in Table 10.2 Recent trends in South Asia’s trade integration 2000–05 (%) Country

Output growth

Trade growth*

Speed of integration**

Bangladesh India Pakistan Sri Lanka

5.4 7.7 4.8 5.3

13.9 33.8 18.7 13.6

8.5 26.1 13.9 8.3

Sources: Tables 2.1 and 2.4 Note * growth rate of sum of merchandise exports and imports volume; ** growth rate of trade minus growth rate of output.

Trade and economic integration

111

the 1990s. Sri Lanka has also slowed down. Unstable politics in both these nations over the early part of the 2000s contributed towards a slower speed.

Doha Round and trade issues The General Agreement on Tariffs and Trade (GATT) was created as one of the UN institutions after the Second World War. The GATT was replaced by the World Trade Organization (WTO) after the Uruguay Round concluded in 1993 after almost eight years of negotiations. The WTO, like GATT, is primarily responsible for the following roles and activities for the member nations: • • • •

WTO polices the world trading system. WTO makes sure member states adhere to the rules laid down in trade treaties signed by the members at the WTO. Presently, 161 member nations collectively account for almost 99 per cent of the world trade. While the WTO has been working on lowering the barrier on trade and the liberalization of trade among member nations, some critics are of the view that this organization is also promoting conflicts in certain circumstances and areas (www.wto.org).

WTO: Doha Round The WTO Doha Round, known as ‘Doha Development Round’, commenced in 2001 in Doha, the capital of Qatar, located in the Arab Peninsula. This round is still current. The major objective of the Doha Round is to introduce discipline into world agricultural trade since the Uruguay Round was unsuccessful in finalizing the agricultural issues in 1993 before its conclusion. In Doha, negotiations in agricultural trade liberalization and the direct inclusion of the developing nations in the negotiations have been major breakthroughs. This round is also regarded as Doha Development Round due to the leading role played by the developing nations in the negotiations. There are five major actors in the negotiations: the US, EU, Japan, Cairns Group of nations led by Australia and the G20. The G20 nations have been led by four large developing nations: Brazil, India, South Africa and China. At Doha, all members of the WTO agreed upon a far-reaching mandate for agricultural trade reform in addition to other mandates. Trade ministers committed to negotiations aimed at ‘substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies, and substantial reductions in trade distorting domestic support’ (www.wto.org; WTO Agriculture Negotiations). In the Doha mandate, it is clear that the member nations have committed themselves to comprehensive negotiations aimed at achieving a meaningful trade reform in agriculture, covering market access, domestic support and export subsidies. These are also known as the three pillars of negotiations.

112

South Asian economic development

Market access At present, agricultural products are only protected by tariffs in WTO member nations (except for Chinese Taipei, the Republic of Korea and the Philippines for rice). There are also some non-tariff barriers in the form of sanitary and phyto-sanitary measures, technical barriers, BOP payment conditions and general safeguards. In addition to the above, it is also mandated that all other non-tariff barriers have to be eliminated or converted into tariffs as a result of the Uruguay Round’s ‘tariffication’ measure (Hossain and Maswood 2006). In the Doha Round, the negotiations on existing tariff reduction mainly involve general tariffs, tariff quotas and tariff quota administration in two phases. In the first phase, discussion on tariffs covered both tariffs on quantities within quotas and those outside. In the second phase of discussions, two proposals emerged for tariff reduction in general. One, mainly, copied the Uruguay Round reduction method and the other, known as a ‘cocktail’ approach, endorsed a flat-rate percentage reduction for all products (see www.wto.org). The other, so-called ‘Swiss formula’ suggests that there should be steeper cuts on higher tariffs. It was supported by the countries previously advocating the cocktail approach. One must note that the Swiss formula was first proposed by Switzerland in the Tokyo Round negotiations in 1970s for industrial tariff reduction. Switzerland does not support this approach in the agriculture negotiations. Domestic support This is regarded as the second pillar of the agriculture negotiations and many WTO members provide support in the form of subsidies to the producers. In WTO terminology, subsidies in general are identified by ‘boxes’, representing the colours of traffic signals. These are: • • • •

Green: Subsidies are permitted to those products designated under green box. Amber: The present subsidies need to be reduced on the products designated under amber box. Red: Subsidies are totally forbidden under red box. However, in agriculture there is no product under red box. Blue: Subsidies are allowed on the products under blue box, but there exists a limit on production of such products.

Export subsidies and competition Under the export subsidy pillar, discussions have taken place in five separate headings: export subsidies; export credit, guarantees and insurance; food aid; exporting state trading enterprizes and export restrictions; and taxes. Table 10.3 presents agricultural producer support in some selected developed nations. From South Asian member nations, India has been playing a major part in the negotiations together with Brazil and South Africa in Doha Round. Unfortunately, in its seventh year of negotiations (2008), the Doha Round has so

Trade and economic integration

113

Table 10.3 Agricultural producer support, selected OECD nations (%) Country

1986–88

2001–03

Australia New Zealand Canada US EU Japan Korea Norway

8 11 33 25 39 60 69 70

5 2 29 20 37 57 65 71

Source: Hossain and Maswood (2006)

far failed to come to a conclusion. The negotiations are almost dead at the present moment due to the uncompromising stand taken by the developed nations on the demand for access to the developing nations’ industrial goods market in return for offering some access to agriculture in developed nations.

Composition and magnitude of South Asian trade The composition of South Asian trade can be presented in two forms: commodity trade and trade with services. Commodity trade The composition of South Asian trade has changed substantially over the last three decades. All the countries studied have undergone changes in their commodity exports and imports. A country-specific illustration on commodity trade is provided below. Bangladesh’s imports in recent years comprise more manufactured goods, machinery and transport equipment than traditional food items. Prominent manufactured items are: textile yarns, cement, iron and other metals, rubber products, paper and paper boards and metal manufactures. More recently, however, the food grain imports have been taking a major share in the total imports of goods and services. Bangladesh is also at present less dependent on traditional exports such as jute, leather and tea. The non-traditional garment industry overtook jute as a major export earner and in the early 2000s it comprised more than 60 per cent of the total exports. There has been considerable success in developing a sizeable export trade in frozen and otherwise processed fish products, of which shrimps are the dominant export item. A major feature of India’s trade in recent years has been the radical change in its composition. Jute and tea were the major export items in the 1960s, but at present major export items include engineering goods, cut diamonds, chemicals, leather goods, fish products and garments. On the import side, the process of import substitution of food grains and finished manufactured goods has led to a sharp fall in the proportion of imports of consumer goods with a rise in the share of raw materials and intermediate goods led by petroleum and uncut diamonds. The demand for imported fertilizers, paper, steel and non-ferrous metals has risen in recent years.

114

South Asian economic development

Pakistan’s trade with the outside world has diversified in recent years. However, the country has seven major export items which dominate in the export trade: raw cotton, rice, cotton cloth, cotton yarn, garments, leather and carpets. These products contribute to 60 per cent or more of total exports. Pakistan’s largest imports are petroleum and petroleum products and more recently manufactured goods have taken a large share of the imports. In Sri Lanka, agricultural exports have remained at least a third of total exports in recent years. Three major traditional exports dominate the sector. These are: tea, rubber and coconut. But in the last two decades, garments overtook tea to become the country’s leading export. The country’s imports have been concentrated in basic foodstuffs such as rice, sugar and wheat. Trade with services It can be seen from the previous section that not only are the market and volume of trade widening, but more and more products are becoming internationally tradable. In South Asia, a significant shift has been noticed in the services sector, where both trade and FDI have been growing very rapidly. The reasons for such growth are: •

•

• •

Many services were considered non-tradable only a few years ago, but they are now being actively traded. Rapid expansion of telecommunications and information technology are central forces underlying these changes. By competing with more and more products and contesting in the industrial countries on these products, new opportunities for long distance service exports have been created. These opportunities have contributed to the efficiency and competitiveness in trade with services in the region. This trend will grow further with the region’s recent adoption of a liberal trade and investment regime (World Bank 1995; Hossain 2005).

Services comprise a wide range of economic activities and the services products can be divided into two distinct parts: knowledge-based services (e.g. professional and technical services, banking and insurance, modern health care and education, financial products and chemical processes) and information technology-based services (e.g. computing facilities and software services). In recent years, India captured the leading role in the South Asian region for exporting these services to outside world. Within the region, the demand for services products has been growing strongly. For example, computer reservation systems for airlines have contributed to a great increase in air travel in the region. India provides a large number of health and education services to neighbouring countries. Since South Asia is a labour-abundant region, its growth in the services trade has been centred on remittance from skilled and unskilled labourers temporarily working in foreign countries. All four countries studied have substantial workforces temporarily working in the Middle East and Southeast Asian countries. Table 10.4 shows the growth in remittances for the four countries in the region over the last 15 years.

Trade and economic integration

115

Table 10.4 Private unrequited net transfers 1981–2005 Country

Private transfers ($ million)

Bangladesh India Pakistan Sri Lanka

1981

1994

2005

900* 2,867 — —

1,115 4,976 1,446 698

4,251 23,725 4,280 2,088

Sources: IMF Balance of Payments Yearbook (several issues); Asia 1997 Yearbook; World Bank (2007) Note * 1992 figure.

Regional trade in South Asia Growth in trade Trade growth, particularly export growth, is a necessary condition for a country to achieve a high rate of economic growth. This has been demonstrated by the highgrowth countries of East Asia over the last quarter of a century. From Table 10.5, it can be seen that the export growth of East Asian countries in the 1990s was above 18 per cent, whereas South Asian countries’ growth rate in exports was 13.5 per cent in the same period. South Asia’s individual country analysis suggests that among the four countries studied, Bangladesh’s and Sri Lanka’s export growth was around 15 per cent per annum during 1990s, whereas India’s and Pakistan’s growth was only around 10 per cent per annum. In the early 2000s, this had been reversed by India and Pakistan. These figures suggest that in the last decade, South Asian countries have been catching up the East Asian nations. This is further demonstrated in Table 10.6. This table presents figures relating to expansion of exports in the two regions between 1990 and 2005. Over this Table 10.5 Growth rates of merchandise trade of South and East Asian economies 1971–80 to 2000–05 (% per annum) Country

Bangladesh India Pakistan Sri Lanka Indonesia Malaysia South Korea Thailand Source: Table 2.4

1971–80

1991–96

2000–05

Exports

Imports

Exports

Imports

Exports

Imports

3.1 4.0 4.9 2.0 7.2 4.8 23.5 10.35

–2.4 3.0 4.2 4.5 13.0 3.7 11.6 3.0

17.1 12.5 9.4 14.9 10.8 17.4 12.9 16.3

9.5 9.8 8.9 14.0 13.0 18.9 14.6 14.7

8.3 12.8 11.6 9.1 — 6.1 — 6.6

5.6 18.4 7.1 4.5 — 6.8 — 8.8

116

South Asian economic development

Table 10.6 Merchandise exports from South and East Asian economies 1990–2005 Country

Bangladesh India Pakistan Sri Lanka Indonesia Malaysia South Korea Thailand

Exports (US$ million)

Exports (% of GDP)

1990

2005

1990

2005

1,671 17,969 5,615 1,912 25,675 417 65,016 23,068

9,294 95,096 15,917 6,347 86,226 520 284,419 110,110

6.0 7.0 16.0 29.0 25.0 24.0 28.0 34.0

17.0 21.0 15.0 34.0 34.0 27.0 43.0 74.0

Source: World Bank (2007)

period, South Asia’s exports increased by almost 6 per cent per year (from a very low base). In East Asia this was increased by almost 5 per cent per annum (from a very high base in 1990). Table 10.6 further shows that between 1990 and 2005, India’s exports as a percentage of GDP increased from 7 per cent to 21 per cent, Sri Lanka’s from 29 per cent to 34 per cent and Bangladesh’s from 6 per cent to 17 per cent. Pakistan’s exports declined from 16 per cent to 15 per cent. These issues are investigated in more detail in the following sections. Trade within South Asia South Asia’s regional trade performance is presented in Table 10.7. The region’s trade has been dominated by India as expected. The volume of trade has continuously grown over time. However, this growth was more dramatic between Bangladesh and India than in any other pair of nations. The second highest growth was between India and Sri Lanka. This pattern has not changed in recent years (see further in the section below on SAARC). The trade balance figures for the region are presented in Table 10.8. This table suggests that India is in the most advantageous position in the region. It had trade surpluses with all three nations (except in 1990 when there was a deficit of US$2 million with Pakistan). For India, the trade surplus against Bangladesh, which was Table 10.7 Regional trade matrix (imports plus exports) of South Asia (US$ million) Country

Bangladesh

India

1990

1990

1996

1990

1996

1990

1996

312

924

141 88

145 245

19 124 106

12 489 125

Bangladesh India Pakistan

1996

Pakistan

Sri Lanka

Source: Pigato et al. (1997) Note The data for preparing subsequent tables are taken from this document.

Trade and economic integration

117

Table 10.8 Regional trade balance in South Asia (US$ million) Country

Bangladesh

India

1990

1990

1996

1990

1996

1990

1996

282

840

65 2

73 –147

–1 –80 –19

–6 –395 –48

1996

Bangladesh India Pakistan

Pakistan

Sri Lanka

Source: see Table 10.7

more than US$800 million, was huge. The second highest surplus was with Sri Lanka and that was about US$400 million. Pakistan has trade surpluses with Bangladesh. Sri Lanka has a deficit with India. Trade between regions Trade investigation between regions contributes to the knowledge of the big picture of trade in terms of direction and share. These are presented in Figure 10.1. The countries under investigation have been trading mainly with the world’s five major regions: North America, the European Union (EU), Australasia (Australia, New Zealand and the ASEAN), East Asia and the Middle East. Trade growth with these regions has remained unchanged in recent years, however, all the countries of South Asia have a trade surpluses with North America. With the EU, only India and Pakistan have trade deficit, but Bangladesh and Sri Lanka have surpluses (see Table 10.9). The relative share of South Asian trade with these regions is presented in Figure 10.2. Two issues become clear from the inter-regional trade analysis. First, regional trade within South Asia is no more than 10 per cent of total trade of any pair of nations. Second, the majority of South Asian nations have trade surpluses with North America and the EU, but all have deficits with East Asia, Australasia and the Middle East. It is also clear that the magnitude of deficits is larger than the surpluses in all cases. Table 10.9 South Asia’s trade balance (exports minus imports) with other regions (US$ million) Country/Region

North America European Union Australasia East Asia Middle East India* Source: SCCI (1995)

Bangladesh

India

1990

1993

1990

163 203 –349 –724 –148 –282

659 514 –639 –1,360 –125 –480

59 –2,743 –449 75 –2,466 –

Pakistan

Sri Lanka

1994

1990

1994

1990

1994

4,789 –841 –311 615 –2,127 –

–251 –166 –245 –518 –272 3

290 –1 –658 –226 –178 –26

283 188 –202 –456 128 –98

849 282 –482 –838 99 –345

118

South Asian economic development

Bangladesh 1993 India

North America

Rest of world European Union Middle East East Asia Australasia India 1994 North America Rest of world

European Union Middle East

Australasia

East Asia Pakistan 1994 India North America

Rest of world

European Union Middle East

Australasia

East Asia

Sri Lanka 1994 India North America Rest of world European Union Australasia

Middle East East Asia

Figure 10.1 Global trade and South Asia (imports plus exports, US$ million)

Trade and economic integration

Bangladesh 1993 Rest of world 25%

North America 18%

Middle East 2%

European Union 24%

East Asia 20%

Australasia 11% India 1994 North America 15%

Rest of world 36%

European Union 27% Middle East 8%

Australasia 2% East Asia 12% Pakistan 1994

North America 12%

Rest of world 33% European Union 25% Middle East 8%

Australasia 4% East Asia 18% Sri Lanka 1994 North America 15%

Rest of world 41%

European Union 22% Middle East 1%

Australasia 7% East Asia 14%

Figure 10.2 Relative shares of South Asian trade (%)

119

120

South Asian economic development

Trade opportunity analysis by country Opportunity for more trade in the region can be analysed by considering three major measures of trade: country-wise balance of trade; country-wise exports and commodity-wise exports. Bangladesh Bangladesh’s balance of trade figures is presented in Table 10.10 and shows a significant improvement during the 1990s with all G7 nations except that the surplus has dropped sharply with Germany and Italy. This drop, however, is compensated by increases in surplus with the US and the UK. The major concern with Bangladesh’s trade area is the continuous growth in deficit with East Asian countries and with India. Almost half of the country’s trade deficit in recent years was with China and India. The destination of Bangladesh’s exports over the 1990s has not changed dramatically, however, the trade figures suggest it exported more than two-thirds of its exports to G7 nations during 1993. This was only 58 per cent of the total in 1989 (see Table 10.11). It appears that the exports to these countries over the five years grew by almost 10 per cent. If Bangladesh carefully nurtures these markets in the future, there will be some scope to make additional exports to these countries. The country should also take steps to explore export markets in East Asia’s fastestgrowing nations. Figure 10.3 presents the export share of Bangladesh’s major commodities. In the seven years between 1989 and 1996 ready-made garments have been the dominant sector. Its share increased from 21 per cent in 1989 to 50 per cent of total exports in 1996. The recent figures suggest that ready-made garments and related textile exports make up almost 66 per cent of the country’s total exports. Also, there has been considerable success in developing a sizeable export trade in

Table 10.10 Bangladesh’s balance of trade with major trading partners (US$ million) Country

1989

1991

1993

United States United Kingdom Germany France Italy Canada Japan Hong Kong Singapore China India World total

324 1 –17 10 88 –92 –417 –152 –360 –99 –148 –1,984

476 19 48 76 116 –89 –242 –249 –183 –199 –280 –1,694

673 155 67 92 55 –17 –296 –396 –447 –393 –460 –2,201

Source: SCCI (1995)

Trade and economic integration

121

Table 10.11 Bangladesh’s exports to major destinations (US$ million) Country

1989

1991

1993

USA

510 (31) 119 (7) 108 (6) 62 (4) 107 (6) 65 (4) 701 (42) 1,672 (100)

734 (36) 151 (7) 166 (8) 107 (5) 137 (7) 52 (3) 690 (34) 2,037 (100)

930 (34) 247 (9) 242 (9) 164 (6) 163 (6) 72 (3) 881 (33) 2,699 (100)

UK Germany France Italy Japan Rest of world Total Source: see Table 10.10.

Note Figures in parentheses are percentages of respective column totals. 1989 Ready-made garments Other

Jute goods

Leather Frozen food

Tea Raw jute 1996 Tea

Other

Raw jute Hosiery products

Ready-made garments

Frozen food Leather Jute goods

Figure 10.3 Bangladesh’s major export products (US$ million)

122

South Asian economic development

Table 10.12 Structure of merchandise and services trade, Bangladesh 1990–2005 (% of total) Merchandise goods

Exports

Imports

1990

2005

1990

2005

Food Agricultural raw materials Fuels Ores and metals Manufactures

14 7 1 — 77

8 2 0 0 90

19 5 16 3 58

19 9 8 2 62

Services goods* Transport Travel Insurance & finance Information & communications

13 6.4 0.1 80.6

23.8 14.8 4.8 56.6

71.1 14.1 12.3 8.3

76.9 6.6 2.0 8.4

Source: World Bank (2007) Note * percentage of commercial services only.

frozen and otherwise processed fish products, of which shrimps are the dominant export items. Table 10.12 presents Bangladesh’s structure of merchandise and services trade in recent years. Manufactured goods and food are the major items which are traded under the merchandise goods category. The services trade, particularly transport and information and communications technology (ICT) goods, also gained prominence in recent years. India India’s balance of trade figures is shown on Table 10.13. Table 10.13 shows, since the economic liberalization in 1991, that the country has dramatically improved its Table 10.13 India’s balance of trade with major trading partners (US$ million) Country

1990

1992

1994

USA Australia Belgium Switzerland Brazil Saudi Arabia Bangladesh China Hong Kong South Korea Sri Lanka World total

59 –672 –1,230 2 –218 –1,226 282 –13 387 –161 80 –6,177

1,275 –754 –1,092 –99 –196 –1,218 343 0 551 –214 217 –4,729

2,369 –651 –583 –380 –397 –1,208 480 –420 1,016 –384 283 –1,379

Source: See Table 10.10

Trade and economic integration

123

trade balance with the US. Its trade surplus with the US was more than $2 billion in 1994, whereas this surplus was a mere $59 million in 1990, the year before India’s launch of trade liberalization policies. However, the major concern about India’s balance of trade is with the Middle Eastern countries. This is due to its huge import of petroleum and petroleum products from this region. Overall, India’s trade deficit was reduced by almost $5 billion over the 1990s. This reduction was possible due to its continuous trade surplus with the US, Bangladesh, Hong Kong and Sri Lanka. It was also possible by reducing deficit with the EU nations. India’s magnitude of exports to various destinations improved dramatically over the 1990s (see Table 10.14). These destinations are the US, Hong Kong and the UK respectively. For example, with the US, between 1990 and 1994, exports increased from 15 per cent of the total to 20 per cent. However, the country’s exports to East Asian nations were disappointing during this period. It has major potential to further explore export markets in the fastest-growing East Asian nations in the future. Figure 10.4 presents the export share of India’s major commodities. Almost onefifth of India’s export earnings have been generated by the gems and jewellery sector. Ready-made garments (RMG) and cotton earned almost 10 per cent of the total export value, and cotton yarn and fabrics earned about 8 per cent of the total. During the three-year period, the export growth of these products remained stable. A slight improvement can only be noticed in the RMG cotton and cotton yarn sectors. Table 10.14 India’s exports to major destinations (US$ million) Country

1990

1992

1994

USA

2,694 (15) 1,656 (9) 1,352 (8) 1,109 (6) 545 (3) 455 (3) 699 (4) 499 (3) 8,728 (49) 17,813 (100)

3,533 (19) 1,523 (8) 1,441 (8) 1,333 (7) 721 (4) 480 (3) 694 (4) 655 (4) 7,954 (43) 18,498 (100)

4,789 (20) 2,025 (8) 1,729 (7) 1,614 (7) 1,349 (6) 988 (4) 900 (4) 814 (3) 9,902 (41) 24,150 (100)

Japan Germany UK Hong Kong UAE Belgium Italy Rest of world World total Source: See Table 10.10

Note Figures in parentheses are percentage of the total.

124

South Asian economic development 1990 Raw cotton

Rice

Other products

Cotton cloth

Carpets & rugs Leather

Cotton yarn

Garments & hosiery 1996 Raw cotton Rice Cotton cloth

Cotton yarn Leather Carpets & rugs Other products

Figure 10.4 India’s major export products (Rs million)

Table 10.15 Structure of merchandise and services trade, India 1990–2005 (% of total) Merchandise goods

Exports

Imports

1990

2005

1990

2005

Food Agricultural raw materials Fuels Ores and metals Manufactures

16 4 3 5 70

9 2 11 7 70

3 4 27 8 51

3 2 36 5 52

Services Goods* Transport Travel Insurance & finance Information & communications

20.8 33.8 2.7 42.7

13.3 16.8 3.5 66.4

57.5 6.6 5.8 30.1

36.7 13.8 6.5 43.1

Source: World Bank (2007) Note * percentage of commercial services only.

Trade and economic integration

125

Table 10.15 presents a breakdown of India’s merchandise and services trade in recent years. Manufactured goods, fuels and food are the major items which were traded under the merchandise goods category in recent years (2005). The services trade, particularly transport and information and communications technology goods, have also gained prominence in recent years. Pakistan Table 10.16 shows Pakistan’s balance of trade figures with its major trading partners. The country’s major achievement on the trade balance front has been with the US during the 1990s. Since 1993 their trade deficit with the US has been converted into a surplus. In 1994, Pakistan had a trade surplus of almost $300 million with the US. The same trend can be found with Japan, China and with the Middle Eastern countries. Overall, the trade deficit of Pakistan has dropped by almost $2 billion over these periods. The major destinations of Pakistan’s exports have been the US, UK, Hong Kong, Germany and Japan. It is the US which was the most important in the 1990s. Since early 1990, Pakistan has increased its exports to the US from 4 per cent to 16 per cent of the total (see Table 10.17). It has further potential to improve its export share with the US and with the EU nations. Figure 10.5 shows that the country’s major export products are concentrated within the cotton and textile industries. The export shares of these industries have been increasing over time. In the mid-1990s, cotton yarn earned the highest amount of exports (18 per cent of the total). The second highest was garments and hosiery (17 per cent) and the third highest was cotton cloth (12 per cent). Table 10.18 presents Pakistan’s structure of merchandise and services trade in recent years. Manufactured goods and food are the major items which were traded under the merchandise goods category in those years (2005). The services trade, particularly transport and information and communications technology goods, have also gained prominence in recent years. Table 10.16 Pakistan’s balance of trade with major trading partners (US$ million) Country

1990

1992

1994

USA Japan Germany Switzerland China Hong Kong Malaysia Iran Saudi Arabia UK Total

–251 –420 –69 –145 –271 248 –216 –141 –298 54 –1,796

–47 –774 –218 –213 –367 517 –344 –95 –181 –46 –2,106

290 –295 –159 –160 –367 536 –609 –103 –280 89 –1,552

Source: See Table 10.9

126

South Asian economic development

Table 10.17 Pakistan’s exports to major destinations (US$ million) Country

1990

1992

1994

USA

695 (12) 278 (5) 414 (7) 476 (9) 457 (8) 184 (3) 223 (4) 112 (2) 2,794 (50) 5,587 (100)

933 (13) 572 (8) 505 (7) 509 (7) 557 (8) 363 (5) 292 (4) 177 (2) 3,344 (46) 7,269 (100)

1,159 (16) 567 (8) 563 (8) 541 (7) 537 (7) 398 (5) 269 (4) 228 (3) 3,079 (42) 7,332 (100)

Hong Kong UK Germany Japan UAE France Netherlands Rest of world Total exports

Source: See Table 10.9 Note Figures in parentheses are percentages. 1990 Raw cotton

Rice

Other products

Cotton cloth

Carpets & rugs Leather

Cotton yarn

Garments & hosiery 1996 Raw cotton Rice Cotton cloth

Cotton yarn Leather Carpets & rugs Other products

Figure 10.5 Pakistan’s major export products (PRs million)

Trade and economic integration

127

Table 10.18 Structure of merchandise and services trade, Pakistan 1990–2005 (% of total) Merchandise goods

Exports

Imports

1990

2005

1990

2005

Food Agricultural raw materials Fuels Ores and metals Manufactures

9 10 1 0 79

12 1 4 0 82

17 4 21 4 54

11 4 22 3 60

Services goods* Transport Travel Insurance & finance Information & communications

59.3 12.0 1.4 27.3

52.7 8.9 3.9 34.6

67.0 23.1 1.4 8.6

36.2 17.8 3.4 42.6

Source: World Bank (2007) Note * percentage of commercial services only.

Sri Lanka Sri Lanka’s improvement in its balance of trade with the US and Germany in the 1990s was dramatic. It increased its trade surplus by almost half a billion dollars with the US and by more than half a million dollars with Germany since the 1990 (see Table 10.19). However, unlike India and Pakistan, Sri Lanka’s overall trade deficit has increased by more than a billion dollars since this period. The major countries with which it increased deficit were Japan, France, Hong Kong, India, Singapore and Thailand. Table 10.20 shows Sri Lanka’s major destinations of exports. The most important destinations from the exports point of view have been the US, Germany and the UK. With the US, it increased its export share by 6 per cent between 1990 and Table 10.19 Sri Lanka’s balance of trade with major trading partners (US$ million) Country

1990

1992

1994

USA Japan France Germany China Hong Kong India Korea Malaysia Singapore Thailand Total

283 –223 3 40 –110 –103 –98 –123 –141 –58 –63 –741

688 –292 47 86 –121 –221 –295 –185 –126 –208 –81 –986

849 –329 –188 105 –154 –324 –345 0 –155 –319 –123 –1,743

Source: See Table 10.9

128

South Asian economic development

Table 10.20 Sri Lanka’s exports to major destinations (US$ million) Country

1990

1992

1994

USA

490 (26) 127 (7) 108 (6) 97 (5) 102 (5) 44 (2) 49 (3) 871 (46) 1,895 (100)

850 (34) 215 (9) 173 (7) 136 (5) 130 (5) 91 (4) 99 (4) 796 (32) 2,488 (100)

1,066 (32) 268 (8) 259 (8) 198 (6) 171 (5) 124 (2) 115 (4) 1,000 (33) 3,332 (100)

Germany UK Belgium Japan France Netherlands Rest of world Total

Source: See Table 10.9 Note Figures in parentheses are percentages. 1990 Other

Tea

Minerals Diamonds

Rubber

Petroleum products

Textiles & RMG cotton

1995 Other

Minerals

Tea Rubber

Textiles & RMG cotton

Diamonds Petroleum products

Figure 10.6 Sri Lanka’s major export products (SRs million)

Trade and economic integration

129

Table 10.21 Structure of merchandise and services trade, Sri Lanka 1990–2005 (% of total) Merchandise goods

Exports

Imports

1990

2005

1990

2005

Food Agricultural raw materials Fuels Ores and metals Manufactures

34 6 1 2 54

22 2 0 4 70

19 2 13 2 65

12 1 13 3 69

Services goods* Transport Travel Insurance & finance Information & communications

39.7 30.2 4.2 25.9

44.3 28.3 4.8 22.7

64.2 11.9 6.8 17.1

61.8 15.3 6.0 16.9

Source: World Bank (2007) Note * percentages of commercial services only.

1994. However, the improvements with the UK and Germany have been 2 and 1 per cent respectively for the same period. Textiles and ready-made garments make up almost half of Sri Lanka’s exports (Figure 10.6). This sector enjoyed only one-third of the total exports in 1990. The traditional tea export from Sri Lanka has been reducing over time. In 1995, it enjoyed only 11 per cent of the total and it has dropped by more than 100 per cent from its 1990 share. Table 10.21 presents Sri Lanka’s structure of merchandise and services trade in recent years. Manufactured goods and food are the major items which are traded under the merchandise goods category in recent years (2005). The services trade, particularly transport and information and communications technology goods, are also gaining importance in recent years.

Prospects of regional integration The term ‘regional integration’ encompasses the broad areas of socio-political, economic and cultural links among the nations joining together in a forum and generally belonging to one or several regions. The ASEAN is one example of such an integration. The purpose in this part of the book is to make an assessment on the prospects of a workable economic integration among the countries of the South Asian region. Economic integration as a separate area of study under international economics has been thriving in recent years (Salvatore 1995; Carbaugh 2009). Two major conferences have been held on this topic: one by the former GATT (Anderson and Blackhurst 1993) and the other by the World Bank (deMelo and Panagariya 1993). The term ‘economic integration’ has been defined by various experts and authors. Balassa (1962), however, provided a comprehensive definition for the term. Balassa defines it as:

130

South Asian economic development economic integration as a process and as a state of affairs. As a process, it encompasses measures designed to abolish discrimination between economic units belonging to different national states; as a state of affairs, it can be represented by the various forms of discrimination between national economies. (1962: 1)

The degree of economic integration ranges from preferential trade arrangement (PTA) to free trade area (FTA), customs union (CU), common market (CM) and economic union (EU). The four South Asian countries studied are loosely connected with a PTA under the present framework of a South Asian regional organization called South Asian Association for Regional Cooperation (SAARC). The PTA arrangement within SAARC is discussed below. As mentioned earlier (see Chapter 1), the four countries studied are the four influential members of the eight SAARC nations. Nepal, Bhutan and Maldives are also included in the SAARC (see Madan 1996 for further details on SAARC). In 2007, Afghanistan was invited to be one of the full members. It became the eighth member of SAARC. Integration of South Asian nations Since the formation of SAARC in 1985, more than two decades ago, the pace of integration among the South Asian nations has not been satisfactory. Political and religious tensions still run high in the region, particularly between India and Pakistan. However, on other fronts, India–Bangladesh and India–Nepal relations have improved substantially since 1996–97 (see below). The major objectives of regional integration are to achieve, within a certain period of time, a freer movement of goods, services, people and capital in the region. In South Asia, through the SAARC arrangement and subsequently with the present PTA, these objectives are expected to materialize in the future. So far, research initiatives on South Asian regional integration have been very few. However, the World Bank’s South Asian Region Unit initiated a study on the subject in the early 1990s (World Bank 1993a). This study identified four preconditions that bring significant success in integrating a region, particularly to becoming an FTA among a group of nations: First, the pre-FTA tariffs should be high. Second, the members of the FTA should be important trading partners before entering into an arrangement. Third, there should be complementarity in demand. For South Asian countries this by and large means entering an arrangement with countries that have different economic structures. Fourth, the differences in economic structure should be based on the ‘true’ competitiveness of the countries involved. This means that arrangements with countries that have substantially different factor endowments are superior to those with similar endowments. (cited by Srinivasan et al. 1995: 29 from World Bank 1993a: 16)

Trade and economic integration

131

As to the possibility of forming a possible South Asian FTA, South Asia hardly satisfies any of the above conditions except the first. As shown in the previous sections of this chapter, South Asian countries trade little with each other. They mainly trade with G7 nations, particularly with North America and Europe. The composition of each country’s exports to these regions is similar, with an overwhelming share accounted for by RMG. The trade between South Asian countries is largely competitive, not complementary. Under these circumstances, it is unlikely to maximize gain from a South Asian FTA. However, a comprehensive study by Srinivasan et al. concluded that: The most preferred option for South Asia is to liberalize their external trade in a coordinated manner and extending the liberalized market access to the rest of the trading world on a Most Favoured Nation (MFN) basis . . . The suggested coordinated liberalization should be viewed as an integral part of extending and deepening the ongoing economic reform process in South Asia. (1995: 36) This proposal can also be interpreted on the principle of open regionalism. This prescription is more likely to be obtained through a bilateral agreement of any two nations than through multilateral means. In this connection Bhagwati and Srinivasan (1993) make the following recommendations specifically on India’s trade reform: Finally, if we are to move to an outward-oriented strategy, seeking to exploit trade and investment opportunities provided by the world economy, then we must take appropriate action to ensure that these opportunities are available to us maximally. Otherwise, we would be operating with one blade of the scissors and ignoring the other . . . more important, we recommend that India now actively start exploring the options of joining in the free-trade blocs that are in place (EC and NAFTA) and which might emerge (in Asia). Else, it stands in danger of losing out to other countries, members of such blocs, in trade access and in attracting investment. (cited by Srinivasan et al. 1995: 33, from Bhagwati and Srinivasan 1993: vi) The major reason behind these recommendations was India’s – and other regional nations’ – trade relations with NAFTA and the EC. India’s trade (imports plus exports) with NAFTA and the EC comprised more than 42 per cent of the total in 1994 and recently this has increased to half of the total trade. In contrast, India’s trade with the countries of the South Asian region is no more than 10 per cent of the total. Therefore, Srinivasan et al. (1995) conclude that the most preferred option for South Asia is to liberalize their external trade in a co-ordinated manner and extend the liberalized market access to the rest of the trading world on an MFN basis. Co-ordination of liberalization policies of each country in the region are needed, mainly to achieve the objectives of expansion of the currently low level of

132

South Asian economic development

trade within the region and to avoid political opposition to liberalization by a country if its imports from neighbours rise faster than its exports to them.

South Asian Preferential Trade Agreements (SAPTA) The regional trade analysis within the four countries studied has shown that South Asian trade makes up no more than 10 per cent of the total trade of any pair of nations. There are many reasons for such a low outcome, however, the major reason is the closed-door trade policies adopted by these countries since gaining independence in the late 1940s. Almost 50 years of restrictive trade policies, particularly among themselves, was mainly due to the apprehension that India, a large nation in the region, could swamp the markets of other smaller nations under a liberalized regime. However, under the SAARC arrangements, the countries of South Asia began working together, particularly co-operating in the areas of cultural and technical affairs after 1985. A limited economic co-operation began in the region in 1993, when the South Asian Preferential Trade Agreements (SAPTA) came into place and were signed by all members of SAARC nations. Under SAPTA, Bangladesh, India, Pakistan and Sri Lanka committed to establishing preferential trade arrangements among their countries. Almost 300 commodities were identified, for which restrictions have been reduced. In the past, India has offered tariff concessions to 106 items, Bangladesh to 120 items, Pakistan to 53 items and Sri Lanka to 31 items (Madan 1996). It was also proposed in 1995, at the eighth SAARC summit in New Delhi, that measures should be taken at the appropriate level to bring the region under a free trade regime called the South Asian Free Trade Area (SAFTA). This proposition cannot be regarded as new in the region. Sixty years ago, in the pre-partition period of the Indian subcontinent (1947), India, Bangladesh and Pakistan were part of a same country and were operating like a common market with a single currency. This experience in the region could be useful to forming a possible SAFTA. To explore this matter further, one must look at it from a historical perspective and explore the arrangements the colonial government put in place with respect to trade and governance of the subcontinent. The southeastern region was divided into three presidencies: Bengal, Madras and Bombay (see Map 10.1). These were the coastal regions of British India with four major seaports: Chittagong, Calcutta (Kolkata), Madras (Chennai) and Bombay (Mumbai). These coastal cities were full of life, servicing the intra- and inter-regional trade of British India (see more in Bhagwati and Desai 1970). However, it would be a monumental task at the present time to bring the whole region under FTA, mainly due to the political tensions between major countries of the region (e.g. India and Pakistan). Forming a full scale FTA in the region seems very remote. Alternatively, it is better to create a manageable and workable sub-regional group within and beyond the South Asian region. Such a move has already been taken recently by five nations: Bangladesh, India, Myanmar (Burma), Sri Lanka and Thailand. This is a move in the right direction. It has been argued that this forum will ultimately work as a bridge between the fastest-growing nations of East Asia and emerging nations of

Trade and economic integration

36

60

64

68

80

76

72

92

88

84

96

100

133 104

36

32

32

28

28

Delhi

Cawnpore 24 Ahmedabad

Bombay

BOMBAY

20

20

ENCY PRESID

16

RESID ENCY

16

24

BENGAL PRESIDENCY Calcutta

Madras

12

MADR

AS P

12

SCALE 0

8

200

400

600

8

800

KMS.

64

68

72

76

80

84

88

92

96

100

Map 10.1 The three presidencies of British India: Bombay, Bengal and Madras

South Asia. A similar attempt could be made in the west, involving India, Pakistan and Tajikistan, to connect South Asia with the newly independent transitional nations of central Asia.

Concluding comments The major aims of India, Bangladesh and Sri Lanka in joining Thailand and Myanmar (two members of the ASEAN) to form a sub-regional group are to expand regional trade with the fastest-growing nations of East Asia and to attract FDI from these nations. As mentioned earlier, through trade reform, a nation expects to achieve two key objectives: to create a market for its exports and to attract foreign investment (Rodrik 1992). In practice, this was the lesson learnt from East Asian experiences (see Tables 10.22 and 10.23). It is evident that in the 1980s, the East Asian nations were considerably more open to trade than the South Asian nations. East Asian nations have also grown much faster. It is also evident that the East Asian nations were more successful than South Asian nations in attracting Japanese FDI, for example. This suggests that a stronger sub-regional integration had taken place in the East Asian region. In recent years, the coastal belt of southeastern China has been successful in attracting FDI from South Korea, Taiwan

134

South Asian economic development

(province of China) and Hong Kong through trade liberalization measures (see Map 10.2). In addition, location-specific advantage is one of the driving forces behind FDI flows. China’s southeastern coastal belt has sufficiently satisfied foreign investors’ demand on such an advantage. One can make a parallel of China’s coastal belt with the coastal regions of southeastern India, southern Bangladesh and eastern Sri Lanka (see Map 10.2). It is expected that in the future, with the encouragement of the newly formed sub-regional grouping, the coastal regions of India, Bangladesh and Sri Lanka are likely to attract East Asian investment. These three countries are currently well placed to attract FDI due to their commitment to developing new infrastructure. For example, Bangladesh, being a delta and having numerous and complex river systems, has constructed bridges over its major rivers to connect northern regions with the coastal belt over the past few years. Additionally, an eight-kilometre long bridge was built over the river Jamuna in 1998. It was built with support from Japan and ADB to link northern and southern Bangladesh. It has been playing a pivotal role in connecting the nation with India in the west and with Myanmar and China in the south east. It is expected that this multipurpose bridge (road, rail and gas pipelines) will make Bangladesh a bridge between two Asias (East and South). It is likely to attract further investment from the east. In addition, recently found natural gas reserves (expected to be 50 trillion cu. ft compared to current 10.5 trillion cu. ft, and believed to be Table 10.22 Merchandise exports and share of world exports 1990–2005 Region

East Asia ASEAN SAARC

Merchandise exports ($ million)

% of total bloc exports

Share of world exports

1990

2005

1990

2005

1990

2005

27,365 863

142,955 7,062

18.9 3.2

22.7 5.5

4.3 0.8

6.1 1.3

Source: World Bank (2007)

Table 10.23 Japanese foreign direct investment in Asia 1951–88 Region

Amount (US$ million)

% distribution

East Asia Indonesia Malaysia South Korea Thailand China

9,804 1,834 3,248 1,992 2,036

30.6 5.2 1.01 6.2 6.3

11 148 18 93

.04 .5 .1 .3

South Asia Bangladesh India Pakistan Sri Lanka

Source: Lim (1995: 81) cited in Riedel (1991: 140)

Trade and economic integration

135

Korea Japan

China

China’s coastline Taiwan

Bangladesh India

South Asia’s coastline

Sri Lanka

Map 10.2 China’s and South Asia’s coastal belt

larger than North Sea reserve) in the Bay of Bengal started to attract further foreign investment from the world’s largest oil companies. Bangladesh’s infrastructure building and establishment of improved transport network in the future will create opportunities to satisfy the long-term demand by both India and Nepal to provide them with inland transit facilities through Bangladesh’s territories. To achieve further integration at a sub-regional level, it will be hard for Bangladesh to reject such a proposition, which will be economically beneficial for all three nations. It appears that, on the issue of providing transit facilities, particularly to India, Bangladesh has divided opinions. The present government seems sympathetic towards such a move, not only for the sake of further regional integration, but also for economic benefits which will come to the nation through revenue generation. The opposition seems undecided on this issue. To address any opposition to transit issues from any corner of the political spectrum, the government should start mobilizing public opinion in its favour without delay. Industrialization, trade prospects and growth in South Asian nations will not only be influenced by their attempt in globalization and open economy policies, but also by the changes they face in the internal trade environment and their policy

136

South Asian economic development

adjustments to those changes. The principal internal environment of the region, which needs to be watched closely, is transit facilities extended to the landlocked SAARC member nations. The issues of road transit, intra-regional trade and economic integration must be taken seriously at this stage of economic development in South Asia. The objective must be to show what prospects the SAARC nations have for expanding their current trade and to integrate the region further with a provision of a road transit system to the neighbouring landlocked member nations. In particular, the road transit should include the southeast sub-region of the SAARC: India (the states of Assam, Meghalaya, Tripura, Nagaland, Mizoram, Monipur and Arunachal), Bhutan and Nepal. The United Nations Conference on Trade and Development (UNCTAD) conducted a study on this subject in 2001. This study concludes that current approaches to alleviating transit problems should concentrate on the following: •

•

Nepal should operationalize its ICD at Birganj as a dry port and establish a significant alternative transit route through the JNPT port on India’s west coast, using railways for hauling containers. Bhutan should construct and establish a dry port at Phuentsholing to stimulate its external trade sector.

The nations of this sub-region will need to establish a road transport system. This road transit facility will ultimately work as a bridge between the fastest-growing nations of East Asia and the emerging nations of South Asia. The issue of transit is going to be the litmus test for the South Asian region in regards to its genuine desire in achieving economic integration. The experience in the last 30 years has been very disappointing. It gave birth to fear, suspicion and lack of trust. Genuine effort will be needed in these nations to remove such a hostile environment and work towards generating meaningful co-operation among these nations in the future. It is essential now to start rebuilding political trust, economic infrastructure and capacity building of human resources towards transit facility, economic integration and growth under the auspices of the SAARC.

11 Agriculture and rural development

Immediately after the Second World War, countries in Asia, Africa and Latin America emerged from centuries of colonial rule and became independent, but they were essentially underdeveloped. The primary concerns of the economists during those days were to achieve rapid economic growth and development in those countries. To achieve these, it was essential to address the problems in production process of the underdeveloped nations. In order to bring about a change in the method of production, which was expected to add to profits, Schumpeter (1951) stressed new machines, new processes, new markets and sources of inputs. In other words, the application of scientific technology to production was emphasized. Lewis (1955) contends that growth of output per head depends basically on two sources: available natural resources and human behaviour of the country concerned. Lewis concentrates on the second source and identifies three major causes of growth: First, there is the effort to economize, either by reducing cost of any given product or by increasing the yield from any given input . . .; second, there is the increase of knowledge and its application . . . and third, growth depends upon increasing the amount of capital per head. (Lewis 1955: 11) Lewis’s prescription on growth theory, in the meantime, has been found impractical due to the huge population boom in the less developed countries (LDCs) in the 1950s and 1960s and their dependency on the agricultural sector. Fei and Ranis (1964), however, developed a surplus labour model for LDCs’ economic growth. Fei and Ranis indicate that it is essential to formulate a theory of growth for a particular type of underdeveloped economy which has a supply of surplus labour and functions within the framework of the capitalist system. They emphasize the capitalist system because, during the 1950s and 1960s in some LDCs, both in Asia and Africa, there was a wave of forming (former) Soviet-style economy. According to Fei and Ranis, the majority of newly independent nations are characterized by the coexistence of two sectors: a relatively large and overwhelmingly stagnant subsistence agricultural sector in which institutional

138

South Asian economic development forces determine the wage rate, and a relatively small but growing commercialized industrial sector in which competitive conditions obtain in the input markets. (Fei and Ranis 1964: 3)

The thesis of Fei and Ranis further argues that . . . it is the agricultural sector which is called upon to supply the manpower as well as substantial portion of the savings fund to fuel the development process. The major contribution to the savings fund is in the nature of a marketable agricultural surplus which may be viewed as agricultural output in excess of agriculture’s own consumption requirements. The emergence of such an agricultural surplus thus obviously depends, on the one hand, on the change in agricultural productivity . . . and, on the other hand, on the growth of the rural population. (Fei and Ranis 1964: 8) Fei and Ranis’s prescription for growth was mainly adopted by South Korea, Taiwan, Pakistan and India. With the application of the Fei and Ranis model, all these countries’ agricultures have developed strongly since the 1970s, but South Korea and Taiwan were successful in channelling savings from agriculture to the industrial sector and have been successful in developing a strong industrial base. Following the Schumpeterian line, in the 1960s, economists and agricultural economists in the US published numerous theoretical and empirical studies on transforming LDCs’ (traditional) agriculture through technological change (Nicholls 1963; Johnston and Mellor 1961; Johnston and Tolley 1965). An outstanding study was done by Schultz (1964), where he hypothesized that there are ‘few significant inefficiencies in the allocation of factors of production in traditional agriculture’. This hypothesis has been widely tested by researchers and generally found to be true. It has been maintained so far by others that the most promising means of increasing the output and income of peasant farmers is the introduction of new technologies as extra factors of production (Mellor 1966, 1967; Southworth and Johnston 1967; Hayami and Ruttan 1971). In real terms, these technologies have high-yielding variety seeds, better breeds of livestock, more efficient implements and machines, fertilizers, pesticide and insecticides (Barlow 1978). Coincidentally, during the 1960s there were 12 international research institutions (e.g. IRRI and CYMMIT) established to develop high-yielding seed varieties for grains and other cash crops. Numerous inorganic fertilizer factories were built to sustain the additional supply of fertilizers in demand in LDCs. Similarly, facilities of irrigation and credit availability to innovative farmers of modernized agriculture were provided either by encouraging them to form co-operatives or through individual contact with the supplying agencies. Almost all developing countries have introduced modern technology into agricultural production during the last quarter of a century. There are two main

Agriculture and rural development

139

reasons for this. First, to attain food self-sufficiency for the growing population. Second, to increase the supply of raw materials for the newly established industrial sector. The countries representing South Asia, Indonesia and the Philippines are commonly identified as the cases for the former; and South Korea, Taiwan, Thailand and Malaysia are regarded as the cases for the latter. Agricultural technology, however, has been classified into two categories: mechanical technology and biological (or biological-chemical) technology. In general, the mechanical technology involves lumpy machinery capital which has labour-saving effects. In contrast, the biological technology depends on divisible inputs, such as seeds and fertilizer, and is usually geared to increase output per unit of land (Hayami 1982). The introduction of these technologies revolutionized agriculture in the 1970s and 1980s. It was regarded as the ‘Green Revolution’. Numerous studies have explained the impact of Green Revolution in South Asian countries. The intention here is not to survey such a vast amount of literature, however, it has been claimed in the literature that additional production of food grains, wheat and rice are the main successes for the Green Revolution. In the next section, a brief survey of this success story is attempted for the countries studied.

Growth in food grain production Cropping contributes more than 80 per cent of value added in agriculture in South Asia. In the cropping sub-sector’s progress, rice and wheat account for more than three-quarters of value adding in cropping. Therefore, the increase in food grains production is the major source of agricultural growth in the four countries studied. Table 11.1 presents in particular the growth in production of cereals and rice over 1985 and 1994. The figures suggest that in Bangladesh cereal and rice production grew more than 14 per cent over ten years. In India, the production growth of these crops was more than 15 per cent and in Pakistan it was 13.5 per cent for cereals and 7 per cent for rice. The Sri Lankan growth, however, remained relatively poor over this period. Table 11.2, in particular, shows the productivity performance in cereal production in four countries over 15 years. Cereal includes wheat, rice, maize, barley, oats, Table 11.1 Cereals and rice production in 1985–94 (five-year averages), (’000 tonne) Country

Bangladesh India Pakistan Sri Lanka

Cereals

Rice

1985/89

1990/94

25,008 174,006 19,456 2,429

28,354 201,056 22,092 2,522

(13.5) (15.5) (13.5) (3.8)

1985/89

1990/94

23,777 97,723 4,820 2,383

27,225 113,402 5,171 2,483

Source: ADB (1996) Note Figures in parentheses are growth from last period in per cent.

(14.5) (16.0) (7.0) (4.0)

140

South Asian economic development

Table 11.2 Yield of cereal 1990/92–2003/05 (kg/ha) Country

Bangladesh India Pakistan Sri Lanka

Cereal 1990/92

2003/05

2,567 1,947 1,818 2,950

3,533 2,391 2,438 3,428

(37.5) (17.5) (33.5) (16.0)

Source: World Bank (2007) Note Figures in parentheses are change in per cent

Table 11.3 Agriculture value-added per worker in 2000 (US$) Country

1990–92

2001–03

Bangladesh India Pakistan Sri Lanka

246 332 589 705

308 381 690 737

(25.0) (11.5) (19.0) (4.5)

Source: World Bank (2007) Note Figures in parentheses are per cent.

rye, millet, sorghum, buckwheat and mixed grain. Of these countries, Bangladesh has achieved the highest productivity growth and Pakistan is in second position. These productivity growths are mainly the effects of seed, fertilizer and irrigation technology introduced in these countries during the last three decades. India and Sri Lanka’s growth was half of the rate achieved in Bangladesh and Pakistan. Overall, agricultural productivity in value-added terms is presented in Table 11.3 for four countries. It refers to the ratio of agricultural value added, measured in 2000 in US dollars, to the number of workers in agriculture. Once again, Bangladesh enjoyed the highest productivity in agriculture among the countries in the region over the ten-year period. However, in absolute terms, Sri Lanka enjoyed the highest value added per worker and Pakistan was the second highest. Bangladesh and India’s value adding in agriculture is almost half of Sri Lanka and Pakistan.

Agricultural transformation: deficits to surpluses of food grains It is claimed in the literature that, in the South Asian region, food shortages were unheard of until the Second World War (Chaudhry 1991). The great famine of Bengal, which struck in 1943, was recorded as a major food-related human disaster. Even at the time of independence in 1947, there was hardly any country of the region which could truly be regarded as a food-deficit area (Pakistan 1983 cited in Chaudhry 1991). The deficit started to emerge only in the 1950s and early 1960s

— 488 105 69

Bangladesh India Pakistan Sri Lanka

129 475 –10 63

1970–75

Sources: SCCI (1995); GOI (1996); GOB (1996)

1965–70

Country 240 513 –142 98

1975–80 236 140 –279 105

1980–85

Table 11.4 Average value of net imports of wheat and rice per year (US$ million)

257 –82 –65 106

1985–88 5 –11 –323 75

1992–93

168 –325 –235 60

1993–94

476 –344 –146 16

1994–95

142

South Asian economic development

due to rapid growth in population and stagnating agricultural and cereal production. The shortages in food grain production made the countries in South Asia spend huge foreign exchange on food imports and also made them dependent on the food aid programmes, mainly from the US (e.g. PL480, a 1970s aid programme). It is in the wake of these developments that food self-sufficiency became a prime objective in South Asia in the late 1960s and early 1970s. South Asia’s planning departments regard the term ‘self-sufficiency’ as the overall fulfilment of food grains requirements from domestic production. It has nothing to do with the fulfilment of adequate food requirements at household levels. The agenda of gaining food self-sufficiency at national levels has been intensely pursued by adopting new technology in agriculture. As a result, net cereal imports began to taper off as early as 1967–68 in India, Pakistan (Bangladesh was then the eastern wing of Pakistan) and Sri Lanka. It is apparent from Table 11.4 that Pakistan became self-sufficient in 1975 and India reached self-sufficiency in 1988. Bangladesh and Sri Lanka remained import-dependent for some rice and wheat during this period, but this has been declining in recent years. Bangladesh’s deficit has been unpredictable since this country’s vulnerability in cereal production is due to flood, cyclone, drought and other natural calamities. In some flood-free, good years, the country reaches close to self-sufficiency, as in, for example, 1992–93 and 1996–97. In the late 1990s, a bumper harvest brought the country close to selfsufficiency in food grains.

Production of export crops and allied products The record in export crop production has been much less impressive than that of food crops in all countries except India in recent years. Much of the export crop sector in the region has an indifferent performance in the 1980s and 1990s. Bangladesh’s jute, jute products and tea exports have been declining over the last two decades. However, frozen fish and shrimp exports have grown strongly. In nominal terms, the export growth of agricultural and allied products has remained stagnant since 1990 (see Table 11.5). Table 11.5 further suggests that India has a strong export growth for all products. The most important among them are spices, oil cake and fish and fish preparation. The total export growth in nominal terms has been more than sixfold between 1980–81 and 1993–94. The spices increased by 52 times, oil cake increased by almost 19 times and fish and fish preparations have increased by more than 11 times. Since 1992, Pakistan has had a dismal performance in the export of its cash crops and allied products. There has been a huge decline in export earnings in all three areas. On an average, the decline was almost 57 per cent between 1992 and 1994. The export of raw cotton in nominal terms declined by more than 450 per cent, rice declined by 102 per cent and cotton yarn decline by only 12 per cent (see Table 11.5). Sri Lankan exports of agricultural and allied products grew at a moderate pace between 1990 and 1994. The overall growth of export values in nominal terms was 5 per cent per year (see Table 11.5). Table 11.5 further shows that all three crops

Agriculture and rural development

143

Table 11.5 Export values of cash crops and allied products 1981–94 Crop

Year 1981–85

Bangladesh ($ million) Raw jute Jute goods Tea Frozen fish and shrimps

India (Rs million) Coffee Tea and mate Oil cakes Cashew kernels Spices Raw cotton Fish and fish preparations Processed foods, fruits and vegetables

Pakistan (PRs million) Raw cotton Rice Cotton yarn Sri Lanka (SRs million) Tea Rubber Coconuts Minor products

1986–91

119.8 345.8 51.2 65.8

105.8 305.3 37.3 134.8

1992–94 71.7 292.7 37 172

1980–81

1990–91

1993–94

2,140 4,260 1,250 1,400 110 1,650 2,170

2,520 10,700 6,090 4,470 2,390 8,460 9,600

5,460 10,590 23,240 10,480 5,690 6,540 25,520

1,160

4,290

9,580

1990

1992

1994

9,554 5,144 17,917

12,944 10,340 29,170

2,322 5,117 25,979

19,823 3,080 2,783 3,199

14,893 2,960 3,691 4,959

20,964 3,582 3,761 6,385

Sources: Sobhan (1995); Tata (1996); SCCI (1995)

grew: tea grew by 5 per cent, rubber grew by 16 per cent and coconut grew by 38 per cent between 1990 and 1994. In sum, the above analysis provides some clear indications that the region has achieved, to a large extent, the objectives of food self-sufficiency. To achieve this objective, all countries have been following a uniform policy instrument, providing adequate seed, fertilizer and irrigation technology to farmers, including small farmers. It is unlikely that in the near future any government will attempt a shift from such a policy until there are genuine indications that the population growth rate has been neutralized with agriculture’s rate of growth.

Is the second ‘Green Revolution’ in the offing? It has been shown that South Asia, until the 1990s, enjoyed a phenomenal growth in food grain production by adopting new seed, fertilizer and irrigation technology. The increase in productivity and bringing more and more land under

144

South Asian economic development

Table 11.6 Adoption of seed-fertilizer-irrigation technology 1992–2003 Country

Bangladesh India Pakistan Sri Lanka

Irrigated land (% of crop land)

Land under cereal (’000 hectares)

Fertilizer use (100gm/hectare of arable land)

1992

2003

1992

2003

1992

2003

33.8 28.3 78.5 28.0

54.3 32.7 81.1 34.5

10,985 100,760 11,777 834

11,511 97,872 12,587 882

1,136 758 962 2,016

1,738 1,044 1,378 2,862

Source: World Bank (2007)

irrigation were universally known as the ‘Green Revolution’. In recent years, international food grain production, according to the FAO estimates, has taken a downward trend (Mittal 2008). There are many reasons for this. Most importantly, global climate change has been regarded as the major cause of crop failures in several parts of both developed and developing regions. In the past, there were warnings that if the two giants, India and China, started buying food grains on a large scale from food-surplus western nations, which has been the case in recent years, the world price of food grains would rise instantly. In 2008, this is what happened. The world has witnessed a phenomenal increase of prices of rice and wheat. This resulted in making extra efforts for policies which would contribute towards creating a second Green Revolution in South Asia. This is illustrated in Table 11.6, which shows how the use of new technology recently expanded further in South Asia (over 1992 and 2003). In Bangladesh, land under irrigation, land under cereal cultivation and fertilizer use increased over this period. In India, however, all these technologies have been expanded except land under cereal cultivation. Like Bangladesh, Pakistan and Sri Lanka increased all these technologies between 1992 and 2003. Inter-country comparison suggests that Pakistan has the highest rate of irrigated land (81 per cent) and Bangladesh has second highest rate (54.3 per cent). Almost one-third of crop land is under irrigation in India (32.7 per cent) and Sri Lanka has slightly above one-third (34.5 per cent) of arable land. Bangladesh, India and Sri Lanka have more opportunities in investing further in building irrigation infrastructure in the future. In all the nations, there are opportunities to bring more and more land under cereal production. Fertilizer use has further scope for expansion in India and Pakistan. Sri Lanka has been using the highest amount and Bangladesh has been using the second highest amount. The expansion of agricultural technology over the last decade certainly suggests that a second Green Revolution is in the offing in South Asia. It is now well established that food grain production due to the expansion of seed, fertilizer and irrigation technology will take an upward turn soon. The next section illustrates India’s food grain production and consumption gap in recent years and projections until 2026 studied by Indian Council for Research on International Economic Relations (ICRIER).

Agriculture and rural development

145

Table 11.7 Supply–demand gap for rice and wheat in India 2005–2026 (million metric tonnes) Food item

2005

2011

2021

2026

Total cereals

25.00

21.19

–2.94

–16.97

Source: Mittal (2008) Note The projections considered a GDP growth rate of 9 per cent and a negative sign indicates a supply-demand deficit.

Demand and supply trends and projected food grain in India In population count, it is well known that India has one-sixth of the world’s population and is the second largest nation (after China), with more than one billion people. Among South Asian nations, India carries more than two-thirds of the population in the region. Thus, it is appropriate here to investigate the present and future food grain production and consumption gap for India. Since India has the largest number of producers and consumers of food grains in South Asia, any reduction in production affects the region adversely. Let us see below how India is going to perform in the future as far as the food grain gap is concerned. Table 11.7 presents the estimates of the supply and demand gap of cereals in India to 2026. A negative gap indicates that the country will be deficit in cereals from 2020, after enjoying a strong surplus during the preceding quarter century. The deficit will even further deteriorate in 2026 and this will hit a deficit of almost 17 million tonnes. The Indian policymakers and government have taken these projections seriously and have started directing investment to building irrigation infrastructure. As mentioned earlier (see Table 11.6), India has only one-third of its arable land under irrigation. This nation has also the lowest rate of use of fertilizer among the nations of South Asia. Thus, it has further scope to increase fertilizer use and increase productivity to meet the deficit of cereals in 2020.

Rural development through decentralization: the case of Bangladesh Rural development initiative in the South Asian region first began in 1959 at Comilla (Comilla Approach) with the establishment of a rural development research and training institute called the ‘Pakistan Academy for Rural Development’ and the establishment of an affiliated laboratory area in and around this institute (Khan 1976). The main purpose of the laboratory area was to set up pilot projects to discover effective models through administrative experimentation. As a result of these developments in the Comilla area, there were at least four models which were experimented with in the 1960s and widely implemented from the early 1970s in the newly independent Bangladesh. These models are:

146 • • • •

South Asian economic development Thana Training and Development Centres (TTDC); Rural Works Programme (RWP); Thana Irrigation Programme (TIP); Two-tier Co-operatives. (Hossain 1983)

In view of the experiments with these rural development programmes in the 1960s, an integrated nation-wide programme, Integrated Rural Development Programme (IRDP), was launched in Pakistan in 1970. IRDP subsequently became the government’s major credit-disbursing agency for large and medium farmers in both Bangladesh and Pakistan. At the same time, globally, the then President of the World Bank, Robert MacNamara, in his annual speech in Nairobi in 1973, called for a new agenda to abolish absolute poverty from earth (MacNamara 1973). In this agenda, he called for a 5 per cent growth by small farmers per year. To achieve this goal, the following measures were identified as essential within a framework of an integrated rural development strategy: • • • • • •

acceleration in the rate of land and tenancy reform; better access to credit; assured availability of water; expanded extension facilities backed by intensified agricultural research; greater access to public services; new forms of rural institutions for the poor.

After this programme, the World Bank initiated a few more approaches to abolish absolute poverty in the late 1970s and early 1980s. These were integrated rural development (IRD) (Sharma and Malhotra 1977) and basic needs (BN) approaches (Streeten and Burki 1978). Along with the World Bank, the rural poor becomes a concern for civil society and social workers of the LDCs and for the aid donors, mainly NGOs of the more developed countries (MDCs). With the co-operation of both these groups in LDCs and MDCs, they have begun to jointly or individually address the problems of the poor. These NGOs modestly began working in the early 1970s worldwide, but they more effectively began working in several countries of South Asia, particularly in Bangladesh. At present, South Asian nations are the home to more than 85,000 NGOs. Of these, 25,000 are in India, 10,000 in Pakistan, 19,000 in Bangladesh and some 30,000 in Sri Lanka. However, in the region, Bangladesh has a strong exposure to the local and overseas NGOs. NGOs are currently involved with almost 75 per cent of the villages (almost 100,000) in Bangladesh and covering almost one-third of its population of 150 million. These projects currently attract more than $500 million foreign funds either from world development agencies or from NGOs of the MDCs (Haq 1997: 93). In recent years, in addition to the NGO movement, Bangladesh has redirected its policies in the development of rural areas via decentralization and devolution. The Local Government Reform Commission, formed by the democratic government in 1996, submitted its report to the government in May 1997. The then

Agriculture and rural development

147

government of Sheikh Hasina (1996–2001) passed a legislation to hold elections for the upazila parishad (sub-district council) and also a bill was passed by the government for establishing zila parishad (district council). The democratic government of Khaleda Zia (2001–06) supported the decentralization plan but was in dispute with cabinet ministers about implementing the upazial parishad, which, if implemented in the current form, would conflict with Member of Parliaments in carrying out development activities. While one can understand the importance of having four-tier (district, sub-district, union and village) local bodies, to introduce reforms at four levels simultaneously is a huge task, particularly from the resources point of view. In other words, the lack of adequate resources will not allow any government to implement a comprehensive programme effectively and the whole process is likely to risk sustainability, as in the past. An implementation in phases is more likely to be successful and also would be practical from the resources point of view. To develop a genuine decentralization strategy for Bangladesh, one must first look at the country’s ability to fund a reform programme which is likely to attain a meaningful and sustainable outcome. In the past, so much money has gone down the drain in the name of decentralization. Examples include Gram Sarkar, a village government programme of 1980, and the upazila project of 1982. The country is not prepared to see these occur again. A sustainable and practical strategy keeping the following outcomes in mind is needed: • • • •

the extent of devolution and transfer of power from a centralized to a decentralized administration; the appropriate functions and resources needed for a decentralized administration; the electoral rules and accountability measures identified for decentralization; an effective management of a decentralized governance in the initial period. (Dillinger and Fay 2001)

A meaningful devolution or revenue sharing and transfer of power from the centre can proceed smoothly in Bangladesh if zila (district) and upazila (sub-district) parishads (council) are established in phases. One must remember that the major objective of decentralized governance is to relieve the centre from governing the local bodies directly. Moreover, the objective is to relinquish some powers of the centre and transfer them to local bodies. This objective can be effectively fulfilled if a local government for a zila is established in the first phase. In the second phase, further strengthening of the upazila parishad and (presently in place) the union parishad will bring the fruits of the decentralized governance to the doorsteps of the vast rural population (Hossain 2003). Contrary to this, the caretaker government between 2007 and 2008 in Bangladesh introduced an ordinance on establishing upazila parishad in the first phase. The elections for the 480 upazila were held on 22 January 2009 for the period of 2009–13. Presently, this act is awaiting approval to become law in the new Parliament, which was put in place on 5 January 2009.

148

South Asian economic development

Upazila parishad: a new road to rural development Table 11.8 presents the number of administrative units currently in place and the boundaries of these units considered to be the basis of establishing the different tiers of local government in Bangladesh. The District Council Law 2000 and the Ordinance 2008 relate to 61 districts of the nation. Three hill districts are being exempted since they will come under a separate arrangement due to the tribal nature of this region. The decentralization proposal under Ordinance 2008, as mentioned earlier, includes three tiers: district, sub-district and union. However, it must be noted that all the district towns plus a few urbanized headquarters of the sub-districts are presently being governed by elected municipal bodies. Seven divisional capital cities run under the city corporation law. Division as a separate tier of administrative unit is almost dysfunctional now and will play no role in future administrative reform in Bangladesh. The centre will be directly linked with the district units according to the Law 2000 and Ordinance 2008. Presently, the third tier (union council) is already in existence. Figure 11.1 shows the level and structure of all the elected local government bodies, if implemented, taking the new Ordinance 2008 into account.

Structure As can be seen from Figure 11.1, an upazila parishad (sub-district council) should consist of elected representatives and government employees. Government departmental representatives will work hand in hand with the council, but administratively they will remain part of the national public service. According to the Ordinance 2008, the council representatives will be elected by adult franchise for five years. The elected officials are one chairman and two vice chairpersons, which must include one woman. All union parishad (lower tier) chairmen, including women, are members of the upazila parishad. The central government officials would work as executors of decision made by the upazila, led by Upazila Nirbahi Officer (executive officer). Other officials include a secretary and pool of government employees representing major national departments.

Table 11.8 Current administrative units in Bangladesh Unit

Number

Average population/unit (’000)

Zila (district) Upazila (sub-district) Union

64 481 4,451

1,741.5 224.7 25.0

Sources: Bangladesh Bureau of Statistics (2005), Pocket Dictionary, Bangladesh Government Press, Dhaka

Agriculture and rural development

149

National Government Prime Minister The Cabinet Ministries

Central Secretariat

Tier 1 District Council (DC)

Departmental heads

Elected Officials Chairman(1) Vice-chairman (1) Female VC (1)

Chief Executive Officer, Secretary of DC & other officials

SDC chairmen & VCs are ex-officio (61 DCs)

Departmental district officials including police

Elected Officials Chairman (1) Vice-chairman (1) Female VC (1) All UC chairmen are ex-officio (463 SDCs) Elected Officials Chairman (1) Members (9) Female members (3)

DC Officials Tier 2 Sub-district Council (SDC)

SDC Secretariat Secretary of the SDC & officials of following depts handed over to SDC: Youth & Sports, Health & Family Planning, Establishment, Women & Children Affairs, Primary Education, L ocal Government, Agriculture, Disaster Relief, & Social Welfare

Tier 3 Union Council (UC)

Other departmental officers & police Employees of UC & SDC Representatives Secretary of the UC & village police (3) Representative of the Agril Department & some family planning assistants but they may not be on govt’s permanent payroll

Figure 11.1 Proposed three-tier local government institutions under the Ordinance 2008

Functions According to the Ordinance 2008, the upazila parishad will have several functions. These are: •

•

•

The parishad holds at least one meeting per month during the office hours. The parishad would have a fixed agenda for such a meeting and would have circulated it to the members at least seven days in advance. However, an emergency meeting can be called by the chairman with a three-day notice. The parishad would be run by several standing committees for a period of two and a half years. The committees would cover the following departments: law and order; health and family planning; agriculture; fisheries and livestock, irrigation, and environment; education; social welfare, development of women and children; sports, culture and youth development; communications and physical infrastructure; administration, finance and accounts; and auditing and evaluation. All these committees would have between five and seven members. The chairman will act as the executive head of the parishad. He/she will chair all the parishad meetings, supervise all the activities of the elected and government officials under him/her and prepare the confidential reports of all departmental representatives.

150

South Asian economic development

Financial management and budget The parishad must prepare a budget every year at least 60 days before the close of the financial year and display the budget in an area where the general public can witness the budget proposals for comments, information and advice. The major sources of revenue and resources of the budget are government allocation and taxes, rates and fees collected from the upazila. For budgeting purposes, every upazila parishad must prepare an income and expenditure statement every year and submit it to the district commissioner’s office at least 60 days before the budget is publicly displayed on the notice board. At the close of every financial year, the parishad must submit an income and expenditure statement for the previous year to the district commissioner’s office at least 60 days before the next financial year. The district commissioner’s office will scrutinize the statement and send it for auditing by the government. The elected sub-district council in Bangladesh is one of the innovative self-government, local-level institutions in the region. This approach brought the local institutions to the doorsteps of the ordinary people. The principles of decentralization and devolution of funds from the centre have been clearly introduced by implementing such an approach. It will take at least five years to establish a successful structure for decentralization and devolved administration at a local level. It will indeed be interesting to see how things unfold in years to come.

Concluding comments The introduction of agricultural technology revolutionized South Asian agriculture in the 1960s, 1970s and 1980s. This was called the ‘Green Revolution’. The major elements of the Green Revolution have been the huge increase in food grain production (i.e. wheat and rice). One estimate suggests that the cropping sub-sector contributes more than 80 per cent of value added in agriculture in South Asia. Within the cropping category, rice and wheat account for more than three-quarters and, therefore, the increase in grain production was the major source of agricultural growth in the region. The growth pattern of cereals and rice between 1985 and 1994 was highest in India and was second highest in Bangladesh. Pakistan’s growth in cereals was equal to that in Bangladesh. However, in the case of rice production, Pakistan grew at half the rate of Bangladesh. Sri Lanka’s growth in cereal production over this period was disappointing. It grew by only one-quarter of Indian production growth. With this record increase in the production of food grains in the two relatively densely populated nations of South Asia, the region has avoided the major food deficits of the past. Until the mid-1980s, all the countries studied except Pakistan were in deficit in food grain production. In 1985, India joined Pakistan as a foodsurplus nation. In more recent times, these two countries have been enjoying a surplus in food grains. Sri Lanka, however, has been either meeting its requirements or experiencing a very minimal deficit. Bangladesh has been struggling in maintaining its deficit at as low a level as possible. However, its efforts have been

Agriculture and rural development

151

dependent upon the mercy of nature since the country is prone to floods and other natural calamities. In recent years, Bangladesh has been successful in reducing the deficit to an all-time low. In some flood-free, good years, the country has become almost self-sufficient. For example, it happened in the years 1992–93 and 1996–97. South Asia was the test case of UN agencies in the field of rural development in the 1960s and 1970s. However, since the early 1980s, the NGOs of both domestic and foreign origins have been the major partners in carrying out rural development activities in the region. It appears that the NGO movement has been successful in bringing some meaningful changes to the millions of poor households by reducing poverty and providing them basic support in the areas of health, education and housing.

12 Climate change, growth and poverty

South Asian economies have been enjoying high to moderate growth over the last decade. For example, the growth of India has been about 8–9 per cent and in Bangladesh it has been 5–6 per cent over the last five years (see Part I). This region has also been improving living standards since the last quarter of the twentieth century. What made this prosperity possible? It is now widely accepted that globalization enhanced international trade and that more and more trade made this region prosper further (see Part II). While this region is making strong progress in the early part of the twenty-first century, new challenges will emerge in the long run. The most important among them is the issue of climate change and its devastating impact on economic and non-economic (social, political and security) affairs of the region. Since the awarding of the 2007 Nobel Peace Prize to former US Vice President Al Gore and the UN Intergovernmental Panel on Climate Change (IPCC) for their works on climate change and global warming, both the developed and developing worlds have realized the urgency in fighting the menace of climate change. The IPCC prediction on global temperature rising by 4°C in 2100 appears to be credible and is acceptable to the climate scientists. The chief cause of this warming is thought to be the burning of fossil fuels, such as coal, oil and natural gas, which release carbon dioxide and other substances known as ‘greenhouse gases’ into the atmosphere (Mia 2008). What is the ultimate outcome? In simple words, as the atmosphere becomes richer in these gases and it becomes a better insulator, retaining more of the heat provided to the planet by the sun. Climate scientists use elaborate computer models of temperature circulation to study global warming. Based on these models, they have made several predictions about how global warming will affect weather, sea levels, coastlines, agriculture, wildlife and human health (Mia 2008). According to the World Bank, South Asia’s poorest of the poor are most at risk due to global warming. In particular, almost 30–40 million people of the coastal belt of the Bay of Bengal will suffer from inundation by 2030. According to Sir Nicholas Stern (2007), even a moderate rise in temperature could cause serious changes to the environment in South Asia. Stern led the ‘Stern Report on the Economics of Climate Change’. It was commissioned by the UK Treasury and released in October 2006. Despite the controversy surrounding the report

Climate change, growth and poverty

153

regarding some of the assumptions and the choice of the social discount rate, it would be irresponsible to ignore the call for urgent global action to fight climate change (World Bank 2008). In view of the above, it is now widely recognized that the South Asia region, in general, and Bangladesh, in particular, would suffer heavily in both economic and social terms from global warming. Moreover, according to Oxford University climatologist Mark New, over the past 30 years snow cover and ice cover may have reduced by 30 per cent in the eastern Himalayas. There is now a real risk that these glaciers might disappear altogether in the coming decades. If this happens, Bangladesh’s mighty rivers originating from the eastern part of Himalayas would severely affect the availability of freshwater and as a result drought and lack of water for irrigation would become permanent features for a nation which had, for hundreds and thousands of years in the past, abundant freshwater. In 2008, the President of Iceland visited Bangladesh and suggested some adaptation measures for climate change. For example, the President suggested the creation of a Himalaya council replicating the Arctic council for countries surrounding the Himalayas, including Bangladesh, Nepal and India, to conduct research and co-operate on combating the accelerating effects of climate change in this region. Taking note of the President’s warning that environmental challenges such as water shortages and soil erosion might spawn the seeds of future conflict, Bangladesh could possibly tap its abundant water resource and preserve it through adoption of scientific means to augment food production. The grim warning that came from President Grimsson was that global warming is now several decades ahead of schedule because the melting of ice sheets in the Arctic and Greenland region. These were projected to occur in the middle of this century, but they have already begun (Khan 2007). Grimsson said: Iceland could possibly serve as an inspiration for switching to clean energy resources, with 100 per cent of the country’s electricity now produced by clean energy sources compared to 80 per cent of it produced from coal and oil half a century ago. (Khan 2007) In short, the ultimate outcome of climate change for Bangladesh can be summarized as follows: Bangladesh will receive a heavier rainfall during the monsoon because the rate of evaporation is expected to increase by up to 12 per cent. Mean monthly rainfall may significantly change over current variability. Monsoon rainfall may increase by 11 per cent by 2030 and 27 per cent by 2070. Due to global warming, over the past 100 years temperature has increased by 0.50°C but in the next 50 years that is, by 2050, the temperature in Bangladesh is projected to rise by 1.5 to 2.00°C. (Hossain 2008)

154

South Asian economic development

A number of studies found that high temperatures would reduce the yields of highyielding variety (HYV) rice during all the seasons throughout Bangladesh. An important study reveals that a 60 per cent moisture stress on top of other effects might cause as high as a 32 per cent decline in Boro rice yield. One-quarter of the country’s land mass is currently flood-prone in a normal hydrological year. This may increase to 39 per cent, and prolonged flooding can effectively reduce overall potential for HYV Aman rice production. Global warming will make tropical cyclones and tornadoes in Bangladesh stronger and more frequent. The category 5 cyclone ‘Sidr’, in Bangladesh on 15 November 2007 and ‘Nargis’, with a similar force, over southern Myanmar in 2008 have already drawn attention to the devastation and frequency of such a calamity (Hossain 2008). Water-related impacts due to climate change and sea level rises are likely to be some of the most critical issues for Bangladesh, not only in relation to coastal and river flooding, but also in relation to enhanced possibility of winter drought in certain areas. In the dry season, river flow will be reduced. Consequently, salinity will penetrate along the coastal rivers. It will cause an increase in evapo-transpiration, which is detrimental to crop growth. It will also result in the release of more carbon from the topsoil (Hossain 2008). Rises in temperature will favour pest and pathogen activities and human health will be at higher risk, that is, increased risk of some infectious diseases like malaria, diarrhoea, dengue, etc. Rising temperatures may jeopardize the forest succession processes. It may result in low productivity and poor vegetative cover of the forest and affect its rich biodiversity. One-quarter of a million hectares of land will become affected by salinity, on top of the three million hectares already affected. Farmers will be forced to grow crops with economically lower returns (Hossain 2008). It has been noticed that in recent years riverbank erosion has taken a serious turn. The farmers have been losing their cultivable land to erosion, without warning, and have become destitute overnight. There being no rehabilitation plan on the part of the government for these vulnerable and naturally evicted farmers, they have no alternative but to migrate to the large cities in search of food, jobs and livelihood after losing farm lands forever. This has resulted in overcrowded cities with evergrowing slums and an itinerant population. For example, Dhaka, the capital of Bangladesh, presently has a population of more than 15 million, which is about 10 per cent of the nation’s total population. The population in Dhaka has doubled over a period of only 20 years, while the nation’s population doubled over 40 years. A similar story in population influx to other regional cities can be found. The cities have been mushrooming with slum dwellers in recent years. This resulted in inviting major catastrophe in food security, housing, transport, education and the health of millions of city dwellers. As far as the prices of food grains are concerned, there seem to be imbalances in the market place (on demand and supply fronts) over the last decade. On the demand side, population growth has been the major source of additional demand. However, the supply side effects have been most daunting. For example, lack of agricultural land, alternative uses of land and increased costs in inputs are the major problems on the supply side.

Climate change, growth and poverty

155

In view of the above, the nation as a whole lost ground in recent years in maintaining its commitments to achieving MDG1 (poverty eradication) by 2015. In particular, it has been claimed that Bangladesh has retreated back to having more than 40 per cent of its population under $1 a day per capita in 2008, as opposed to 36 per cent in 2005. This calls for urgent policy interventions and planning to effectively address the food security situation in the future and to make progress on other MDGs. Of Bangladesh’s 150 million people, more than 30 million are likely to be directly affected by climate change, according to World Bank, in the next 30 years. Thus, it is appropriate here to investigate more closely the climate change, growth and poverty issues of Bangladesh and the lessons for other nations in the region. Before attempting this, let us look at the global and other regional studies that were recently conducted on these issues.

Recent climate change studies Fighting climate change: human solidarity in a divided world The UNDP dedicated its 2007/2008 Human Development Report (HDR) on the issues of climate change globally (UNDP 2007). This study has four chapters. They examine: first, the challenges of climate change in the twenty-first century; second, risk and vulnerability due to climate shocks in an unequal world; third, the possible strategies for mitigation of climate change dangers; and fourth, adaption to climate change through national action and international co-operation. The study makes it clear that there are no ‘ifs’ or ‘buts’ on the subject of climate change and its aftermath in the twenty-first century, both in developed and developing countries alike. The time has come for a decision to be made on how to mitigate such a disastrous and dangerous manmade menace which has generally been created over the last century. Mitigation must seriously consider how to bring both the developed and the developing worlds closer in making future strategies. Collective action is needed to face the disaster globally. The study has identified five transmission ways by which climate change could stall and then reverse human development. These are: • • • • •

agricultural production and food security; water stress and water insecurity; rising sea levels and exposure to climate disasters; ecosystems and biodiversity; human health. (UNDP 2007)

Due to the increases in global temperature, 3–4°C could result in 330 million people (5 per cent of the world population) being permanently or temporarily displaced through flooding.

156

South Asian economic development

In order to avoid such a calamity in our life time, unparalleled collective action and international co-operation in the time ahead is needed because none of the above mechanisms will operate in isolation. There should be some meaningful strategies devised for mitigation. Most importantly, carbon markets are a necessary condition for the transition to a low-carbon economy, however these are not sufficient conditions. Why carbon markets? It is now established without a doubt that a sustainable global carbon emissions strategy will be the major pathway of mitigation. The study makes it clear that without meaningful adaptation strategies through national action and international co-operation, it will be simply impossible to achieve the MDGs by 2015. The study finds that the world is drifting into a world of adaptation apartheid. If this happens, the MDGs will not be achieved by 2015 and the world will remain as divided as it was in the last century, with the majority poor and disadvantaged. The study concludes that, certainly, the stakes are very high if the world cannot decide soon on the universal adaptation measures for climate change. The Intergovernmental Panel on Climate Change (IPCC): sixth technical paper on climate change and water The IPCC’s sixth technical paper (Bates et al. 2008) was released in June 2008. This paper deals with the issue of freshwater. Sea level rise has been dealt with only insofar as it can lead to impacts on freshwater in coastal areas and beyond. Freshwater is not only related to climate and biophysical systems, it is also interconnected with socio-economic systems which encompass multi-country and multi-origin regional networks. Hence, the study makes it clear that the relationship between climate change and freshwater resources is of primary concern to human society and it also has implications for all living species. The study found abundant evidence that freshwater resources are vulnerable and have the potential to be strongly impacted by climate change, with wide-ranging consequences for human societies and ecosystems. Following are the major conclusions of the study: • •

• • •

Observing warming over several decades it has been found that there is a link between warming and change in large-scale hydrological cycle; By the middle of the twenty-first century, annual average river runoff and water availability are projected to increase as a result of climate change at high latitudes and in some wet tropical areas and decrease over some dry regions at mid-latitudes and in the dry tropics; Increased precipitation intensity and variability are projected to increase the risks of flooding and drought in many areas; Water supply stored in glaciers and snow cover are projected to decline in the course of the century; Higher water temperatures and changes in extremes, including floods and droughts, are projected to affect water quality and exacerbate many forms of water pollution;

Climate change, growth and poverty • • •

• • •

•

157

Globally, the negative impacts of climate change on freshwater systems are expected to outweigh the benefits; Changes in water quantity and quality due to climate change are expected to affect food availability, stability, access and utilization; Climate change affects the function and operation of existing water infrastructure – including hydropower, structural flood defences, drainage and irrigation systems – as well as water management practices; Current water management practices may not be robust enough to cope with the impacts of climate change; Climate change challenges the traditional assumption that past hydrological experience provides a good guide to future conditions; Adaptation options designed to ensure water supply during average and drought conditions require integrated demand-side as well as supply-side strategies; and, Water resources management clearly impacts on many other policy areas. (Bates et al. 2008: 3)

Regional review of the economics of climate change in Southeast Asia The Asian Development Bank (ADB) has been putting in place several projects on the climate change issues affecting the Asia-Pacific region. Most important are the establishment of climate change funds and a review of the economics of climate change. The former concerns the collaboration with the member nations in Asia and the small island nations of the South Pacific in funding adaptation and mitigation projects on climate change impacts. The latter concerns the impact of climate change in Southeast Asian nations. The ADB is of the view that this region is expected to suffer from many of climate change’s most detrimental impacts. Coupled with recurring food, oil and financial crises, climate change will have very serious implications for the region’s economic potentials and well-beings of its people. Climate change is now clearly recognized as development issue, with significant impact on all our efforts for poverty alleviation in the AsiaPacific in general, and Southeast Asia in particular. While climate change is by nature an environmental issue, it is of greatest concern to all of us and has much more far reaching adverse impacts on people’s health, safety and livelihoods – with the poor being disproportionately affected. ADB believes that we can play an important role in this effort. Our recently approved Strategy 2020, ADB’s long term strategic framework, provides a forward looking platform for us to focus on climate change responses as an integral element for sustainable growth and poverty reduction. (Schafer-Preuss 2008: 2–3) The regional review study of the ADB has three major objectives: •

Contribute to the regional debate on economic costs and benefits of unilateral and regional actions on mitigation and adaptation measures, for example, to

158

•

•

South Asian economic development promote consensus and co-operation among policymakers in the region on the steps needed to address climate change; Raise awareness of the urgency of climate change challenges and their potential socio-economic impact in the Southeast Asian region to improve understanding of the economics of climate change; and Support government and the private sector to mitigate and adapt to climate change and also include other stakeholders such as civil society, academia and media. (adapted from Schafer-Preuss 2008)

Under the ADB project, five national consultations have so far been conducted in Indonesia, the Philippines, Singapore, Thailand and Vietnam. The latest consultation was held in Indonesia. It covered all the participant nations in the region in November 2008. The review is in progress at the time of writing this chapter (early 2009).

China’s policies and actions for addressing climate change It is appropriate at this stage to bring in China’s recent unilateral initiatives on climate change issues and report them here briefly since the country is South and Southeast Asia’s populous neighbour. China claims that it has a comprehensive plan to fight climate change. The Information Office of the State Council published a white paper in October 2008 (Information Office 2008; and excerpts published in the China Daily, 20 October 2008, www.chinadaily.com.cn). This study entitled, ‘China’s Policies and Actions for Addressing Climate Change’, contains a comprehensive plan of action to fight global and local climate change crises. The study has eight sections, starting with China’s climate change situation and the nation’s commitments in fighting climate change. China recognizes that there are genuine threats to the complex and vulnerable eco-systems, as well as to the economic and social development of the country. These threats are particularly pressing in the fields of ‘agriculture and livestock breeding, forestry, natural ecosystems and water resources, and in coastal and eco-fragile zones’ (China Daily 2008). Thus it recognizes the domestic challenges and the need to participate in worldwide efforts, such as the activities of the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and other international co-operative efforts, to address climate change. Let us briefly look at how the individual section addresses the plan to fight climate change in China. Climate change and China’s situation China has 20 per cent of the world’s population. Its population reached 1.3 billion at the end of 2007. Geographically, the nation is characterized by uneven weather patterns in various parts. The north is characterized by prolonged winter months and the south and southeast are characterized by continental monsoon climate and the west has the influence of the Himalayas’ snowy weather and western desert. All

Climate change, growth and poverty

159

these culminate in a fragile eco-environment with serious soil erosion and desertification. Meteorological administration of China (China Daily 2008) shows that the nation experienced 21 warm winters from 1986 to 2007. The 2007 winter was the warmest winter since the start of systematic meteorological observations in 1951. The average surface temperature in China rose by 1.1°C over the past century (1908–2008), compared to world averages of about 0.50–0.74°C. This research predicts that the climate warming in China will further intensify in terms of frequency of extreme climate events, uneven distribution of precipitation, expansion of drought in frequency and area and the rise of sea level. China also recognized that the ongoing industrialization process in China and its coal-driven energy mix are also responsible for the greenhouse gas emissions in the atmosphere, although China’s emissions are thought to be much lower than the other industrialized nations. It is reported that from 1904 to 2004, carbon dioxide emissions from burning fossil fuels in China made up only 8 per cent of the world’s total even with almost 20 per cent of the world’s population. In recent years (2004, for example), the nation’s carbon dioxide emissions from energy consumption totalled 5.07 billion tonnes. Although this suggests a moderate emission by any world standard, the country claims that it will strive for genuine and rational growth of energy demand in the future as it progresses as a developing nation. Impact of climate change in China The white paper addresses the impact of climate change in the fields of agriculture, livestock breeding, forestry, natural ecosystems, water resources and coastal zones. Impact on agriculture and livestock breeding It has been observed that due to the drought and high temperatures in some parts of the country, agriculture and livestock sectors have been affected adversely. For example, these include aggravated spring freeze injury to early-budding crops due to climate warming, decline in the output and quality of grasslands and augmented losses caused by meteorological disasters. Impact on forestry and other natural ecosystems It seems the northern boundaries of the eastern subtropical zone have been shifting northward. It has been observed that there is an upward shift of the lower boundaries of forest belts in some parts of the country. In northwest China, the glaciers are shrinking and the oasis ecosystem is being threatened by accelerated melting of glaciers and snow cover. Impact on water resources It has been established by the climate scientists in China that climate change has already caused changes in the distribution of water resources all over China. In

160

South Asian economic development

particular, the accelerated melting of glaciers in western China is due to climate warming. It will further reduce the area of glaciers and glacier ice reserves and thus have a significant impact on rivers and runoffs which have sources in glacier melt freshwater. Impact on coastal zones The past 30 years have witnessed an accelerated trend of sea level rise, which has caused freshwater intrusion, soil salinization and coastal erosion, damaged the typical marine ecosystems of coastal wetlands and so on. It is predicted that the sea level in the coastal zones will continue to rise. Impact on society, economy and other fields The white paper finds that the climate change will produce far-reaching impacts on society, economy and other fields, and cause huge losses to the national economy. In addition, there will be increased chances of disease occurrence and spread, causing dangers to human health, rising possibilities of geological and meteorological disasters and consequent threats to the security of major development projects. Strategies and objectives for addressing climate change To address threats from climate change the following principles have been adopted by the Chinese government in 2008: • •

• • • •

•

• •

Address climate change within the framework of sustainable development. Developed countries should take the lead in reducing emissions since they are responsible for the current level of high emissions over decades and provide financial support and technological support to developing countries. Place equal emphasis on both deceleration and adaptation to climate change. Rely on the advancement and innovation of science and technology. Rely on mass participation and extensive international co-operation. Strive for unilateral control of greenhouse gas emissions by introducing energy conservation measures such as introducing new laws, applying energy conservation technologies, introducing new market-based mechanisms for energy conservation, and accelerating the building of a resource-conserving society. Optimize the energy consumption structure through developing renewable energy, boosting nuclear power plant construction and utilization of coal-bed gas. Strive to control emissions of methane in the cultivation of rice and strengthening sustainable R&D in agriculture and animal breeding. Strive to realize the target of a 20 per cent increase in the forest coverage rate by 2010.

Climate change, growth and poverty •

161

Enhance the capacity of adaptation to climate change through early warning mechanisms, adjustment of cropping system, natural forest conservation, monitoring of the trend of sea level change and enhanced public awareness and improving management. (adapted from China Daily 2008)

Policies and actions to decelerate climate change China has adopted a number of policies and measures to reduce the impact of climate change. The major policies among them are: • • • • • •

accelerating the development of the service sector and bringing down the economy’s reliance on industry and agriculture; making hi-tech industry larger and stronger and decelerating the pace of backward production capacity under the eleventh five-year plan (2006–10); limiting the expansion of industries that consume a large amount of energy and discharge heavy emissions; placing energy conservation and emission reduction in a more prominent manner; accelerating the construction of major energy conservation projects; promoting energy conservation and emission reduction in key fields such as building material industries, clean coal, recycling and treatment of discarded electrical equipment agricultural production and so on. (adapted from China Daily 2008)

Policies and actions to adapt from climate change China’s policies and actions to adapt to climate change mainly cover the areas of natural ecological systems, such as agriculture, forestry and water resources, as well as ecologically fragile areas like coastal zones and regions. Let us examine them briefly. Agriculture It has been observed that in agriculture, improvement of legal and regulatory areas have been given major importance. Improvement in the following laws has been given priority: • • • • • •

Agriculture Law; Grassland Law; Fisheries Law; Law on Land Management; Regulations of Responses to Major Emergent Animal Epidemics; Regulation of Grassland Fire Prevention. (adapted from China Daily 2008)

162

South Asian economic development

Through the so-called ‘Seed Project’, China appears to be making further progress in cultivating stress-restraint varieties of seeds with high-yield potential and crops resistant to drought, water logging, high temperature, disease and pests. In the area of livestock, similar improvements are being contemplated. Forests and other natural ecosystems China has been making efforts in recent years to protect forests and other natural eco-systems by formulating and enforcing relevant laws and regulations. Most important among them are: • • • • • • •

Forest Law; Law on the Protection of Wild Life; Law on Water and Soil Conservation; Law on prevention and Control of Desertification; Regulations on Conversion of Farmland to Forests; Forest Fire Prevention Regulations; Regulations on Forest Diseases and Insect Pest Prevention and Control. (adapted from China Daily 2008)

The white paper also suggests that the nation will further strengthen the protection and management of forest land, forest and wildlife resources and continue projects for the conversion of crop land to forest and grassland, wildlife conservation and nature reserve development and wetland protection with a view to push forward the sustainable development and management of forests and intensify efforts in ecological water and soil conservation. China has developed and enforced laws and regulations in the area of water management, enforcing new water law, flood control law and regulations on river administration. It has been observed that, by 2007, the country had made efforts to bring soil and water erosion under control over an area of 1 million sq. km, thus effectively protecting the soil and water resources and improving the ecoenvironment. In addition, China has established various measures in accordance with the Marine Environment Protection Law to adapt to climate change. The nation established a decision-making mechanism and a co-ordination mechanism for comprehensive management of coastal zones, thereby striving to slow down and adapt to the adverse impact of climate change. The country has enhanced its capacity to monitor and issue early warnings about extreme climate events such as typhoons, floods and regional intense thunderstorms. Enhancing public awareness in addressing climate change It appears that China is well ahead of other developing nations in giving importance to educating public concerning the environment and climate change, as well as making the general public participate in relevant activities. In recent years, it has

Climate change, growth and poverty

163

been observed that the government has constantly guided the general public in enhancing their awareness of climate change and has been preaching the concept of harmonious development between man and nature through publicizing and implementing such advanced ideas as the Scientific Outlook on Development, establishing a harmonious society and sticking to the sustainable development road. Moreover, the academic institutions (i.e. schools, colleges and universities) and the print and the electronic media have been playing major roles in promoting the concepts of building a resource-saving and environment-friendly society to face the climate change menace in the future. Enhancing international co-operation on climate change Based on the ‘mutually beneficial, pragmatic and effective’ (China Daily 2008) principle, China actively participates in and promotes international co-operation in the field of climate change. The nation’s president and premier have taken a clear position on international co-operation in the past at various bilateral and multilateral forums, for example, outreach session of the G8 summit, Asia Pacific Economic Cooperation (APEC), East Asia Summit (EAS) and so on. China was committed to implementing the UNFCCC and Kyoto Protocol right after signing these two documents. Chinese climatologists and experts have been working hard for the IPCC, making a major contribution to the various IPCC-led reports and technical papers on climate change. China is an official member of the Carbon Sequestration Leadership Forum, the Methane-Market Partnership and the AsiaPacific Partnership on Clean Development and Climate. In bilateral exchanges, China has set up a dialogue and co-operation mechanism on climate change with the EU, India, Brazil, South Africa, Japan, the US, Canada, the UK and Australia, focusing on co-operation in the field of climate change. China has been helping African countries and small island nations in the South Pacific to improve their ability to cope with climate change. Institution and mechanism building for coping with climate change The Chinese government established special institutions to deal with climate change back in 1990 and established the National Coordination Committee on Climate Change (NCCCC) in 1998. A strong committee, National Leading Group to Address Climate Change, is headed by the Chinese premier and was established in 2007 to draw up important strategies, policies and measures related to climate change. The membership of this committee increased from 18 to 20 in 2008. The general responsibility has been vested in the National Development and Reform Commission (NDRC) in respect to climate change. The National Leading Group was placed in the NDRC. Conclusions In view of the above discussions on China’s white paper on climate change, it is clear that China has been placing top priority on minimizing the impact of climate

164

South Asian economic development

change. Certainly, the country has a comprehensive plan of action to adapt to climate change in the future. The adaptation mechanisms presently in place have both local and international significance. It appears that locally China is well ahead of other developing nations, facing the climate change menace in a planned manner. The comprehensive plan of action to fight climate change certainly made the nation proud and prepared itself for successfully combating any climate change-related emergencies. However, one must not forget that the vastness of China in both area and population, together with the variable continental weather pattern, make the country the most vulnerable to climate change dangers in the future. In terms of international co-operation and multilateral agreements on climate change issues, China is well placed in the negotiation process due to its economic strength and rising military power in the present world. The ongoing global financial crisis may have pulled the break on the climate change negotiations at international level and forums temporarily. China, certainly has a major role in restarting the dialogue at the international level without further delay due to the global financial meltdown. China must play its leadership role in the world forums to address the challenges of climate change issues. The above discussions on the studies surrounding global, regional and national climate change and related issues lead to an investigation on these issues concerning South Asia. This chapter concludes by analysing South Asia’s efforts. Climate change, growth and poverty in South Asia In Part I, it has been demonstrated that the countries studied have been enjoying high to moderate growth over the last decade and that there has been significant achievements in alleviating poverty along the line of MDGs (except for some setbacks due to the unprecedented natural disasters that hit Bangladesh and India over the last two years). The global financial meltdown and recession, together with fuel price and food price increases, in 2008 also took their toll on poverty alleviation in the region. For example, Bangladesh’s poverty in US$1-a-day per capita terms nosedived from 35 per cent of the total population in 2006 to 40 per cent in 2008. In India, it is feared that poverty has increased from 30 per cent to 36 per cent in US$1-a-day per capita over 2006 and 2008. A similar reverse trend can be witnessed in Pakistan and Sri Lanka. These two nations, moreover, have the added burdens of terrorism and civil war contributing towards the economic downturn and the reversal of whatever achievements have been made in the areas of MDGs. With such a background, the present section demonstrates how the region copes with climate change challenges with respect to growth and poverty alleviation. On the impact of climate change on South Asia’s poor, the World Bank (2008) concludes the following: •

decreased water availability and water quality in many arid and semi-arid regions

Climate change, growth and poverty • • • • • • • •

165

an increased risk of floods and droughts in many regions reduction in water regulation in mountain habitats decreases in reliability of hydropower and biomass production increased incidence of waterborne diseases such as malaria, dengue and so on increased damages and death caused by extreme weather events decreased agricultural productivity adverse impacts on fisheries adverse effects on many ecological systems

In the past, the World Bank carried out several country-level studies on large South Asian nations to investigate the impact of climate change and how to adapt in the future. For ready reference, lists are provided below for Bangladesh, India and Pakistan. Bangladesh • • •

Health impact of air and water pollution in Bangladesh Management of water quality in Dhaka Expanding renewable energy in Bangladesh

India • • • •

Country water resources assistance strategy Unlocking opportunities for forest-dependent people in India For a breath of fresh-air: ten years of progress and challenges Better crops, higher incomes for farmers of Karnataka watershed

Pakistan • • •

Pakistan: country water resources assistance strategy Pakistan water economy Household use of commercial energy in Pakistan

Other reports of interest • • • •

An investment framework for clean energy and development Building country capacity to combat climate change Manage climate risk: integrating adaptation Will markets direct investments under Kyoto Protocol? (www.worldbank.org)

It was mentioned at the start of this chapter that, according to the World Bank, Bangladesh is among the South Asian nations most affected by and vulnerable to the impacts of the climate change menace. The nation has the world’s largest delta

166

South Asian economic development

and its neighbours, southern India and Myanmar, have large deltas as well, which are areas also vulnerable in this regard. The World Bank has estimated that by 2050, Bangladesh will have almost 30–40 million people directly affected by sea level rise presently affecting southern Bangladesh in the mouth of the Bay of Bengal delta. Because of Bangladesh’s extreme vulnerability in the region to the climate change impacts, in this study it is appropriate to look at the consequences of climate change on one of the most populous nations of South Asia. This is attempted below. The case of Bangladesh Bangladesh is situated on the largest delta plain in the world at the confluence of the Ganges, Brahmaputra and Meghna river systems (see Map 12.1), which collect water from the Himalayas and north-eastern hills of India. Metcalfe (2003: 301) states that ‘the Bangladesh landscape is a flat to gently undulating delta flood plain with a network of river systems. Half of the delta plain is at elevations less than 10m above sea level’. As Map 12.1 shows, the southern coastal region forms part of the largest mangrove forest complex, called Shundor Bon (listed as a world heritage area), in the world. Natural resources of Bangladesh include abundant summer freshwater, alluvial land, sweet water and sea fisheries, forests and wildlife. The huge population of 150 million is rapidly expanding, placing immense pressure on the country’s natural resources and the environment. (See basic facts about Bangladesh in Table 12.1.)

75°

80°

85°

90°

95°

0

300 km

PA

K

IS

TA

N

Rivers International boundaries

CHINA

30°

G

.

.

a

R. na

Bahadurabad

R

.

Gan ges River .

So

Ri ve r

iR

R ati

R

Brahamaputra Basin Meghna Basin

st

Farakka Barrage Feeder Canal Jangipur Barrage Hardinge Bridge

Kolkata

BANGLADESH

a utr m ap

INDIA

hna Meg

R.

25°

Bhairab Bazar

Gorai . R

k

INDIA Ganges Basin

Brah

Te e

gm

da

B

BHUTAN

Ba

an

er Riv

G

a etw

ve r

am ali R. m gan ga R .

Ko s

ve r

am Ch

NEPAL

Ri

Ra

R.

s

Ri

K

bal

ge

Hooghly R.

an

Ya m un a

Bay of Bengal

Map 12.1 The Ganges, Brahmaputra and Meghna river basins

MYANMAR 20°

Climate change, growth and poverty

167

Table 12.1 Basic facts about Bangladesh Official name Territorial borders with Area Capital Second city Population Urban population Ecological footprint (area units/person)

People’s Republic of Bangladesh India (west, east and north), Myanmar (east), Bay of Bengal (south) 144,000 sq. km Dhaka Chittagong (sea port) 150 million 30% 0.53 (1999)

Source: Metcalfe (2003)

Climate change and natural hazards According to Metcalfe (2003), Bangladesh is extremely vulnerable to the effects of global warming and climate change due to its low elevation on a giant delta flood plain. The major concerns are listed below: • • • •

drainage congestion reduced freshwater availability in the dry winter months increased intensity and frequency of major floods rising sea level

While Bangladesh cannot have a major role in the mitigation of human greenhouse gas emissions, it remains very much on the receiving end and suffers from the consequences of climate change. Global surface temperature has increased significantly (by about 0.6°C) since direct measurements began in 1860 (see Figure 12.1). The IPCC’s projections on global warming suggest a temperature rise of between 1.4 and 5.8°C from 1990 to 2010, which may cause a rise in sea level through polar ice melt and thermal expansion of between 8 and 88 cm (Watson 2001 cited by Metcalfe 2003). Sea level along the Bangladesh coast is currently rising by 3 mm per year. Catastrophic monsoons, which previously occurred only every half a century on average, are likely, due to global warming, to occur every decade or more frequently by the latter half of this century (Palmer and Raisanen 2002 cited in Metcalfe 2003). Metcalfe (2003: 305) maintains that ‘During the winters, it is expected that reduced river flow will lead to reduced freshwater availability, drainage congestion due to over silting, and more pronounced salt water incursion along the coastal zones’. Increasing devastation from cyclones is also likely with rise in sea level. It would also have impacts on the availability of coastal resources (World Bank 2000). Bangladesh was also subject to recurrent droughts in recent times. Between 1960 and 1991, droughts occurred 19 times, with extreme severity in 1961, 1975, 1981, 1982, 1984 and 1989. In recent years, almost annually, some parts of the nation, particularly the north, have been subject to drought from a moderate to severe range (Metcalfe 2003).

168

South Asian economic development

0.4 0.3

The past 140 years (global)

0.2 0.1 0 −0.1 −0.2 −0.3 −0.4 −0.5

1860

1875

1890

1905

1920

1935

1950

1965

1980

1995

0.6 0.4

The past 1,000 years (northern hemisphere)

0.2 0 −0.2 −0.4 −0.6 −0.8 1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

2000

Figure 12.1 Departures in temperatures in °C for the past 140 years (globally) and the past 1,000 years (northern hemisphere)

With projected future climate change in Bangladesh (see Table 12.2) droughts will become more frequent and more severe, and will have significant detrimental effects on agricultural production in the country. Ecological footprint The ecological footprint of a country estimates the population’s consumption of energy, food and materials in terms of the area of biologically-productive land required to produce those natural resources or absorb corresponding carbon dioxide emissions. Wackernagel et al. (1997) define the ecological footprint as ‘the biologically productive area required to continuously provide resource supplies and absorb wastes of a particular population given prevailing technology’ (cited in Metcalfe 2003: 314).

Climate change, growth and poverty

169

Table 12.2 Climate scenarios for Bangladesh in 2030 and 2050 Year

Sea level rise (cm)

Temperature increase (°C)

Precipitation fluctuations compared to 1990 (%)

2030

30

2050

50

+0.7 in monsoon +1.3 in winter +1.1 in monsoon +1.8 in winter

–3 in winter +11 in monsoon –37 in winter +28 in monsoon

Source: Metcalfe (2003)

Figure 12.2 presents the ecological footprint of selected developed and developing countries, including Bangladesh. The figures on footprint suggest that overconsumption is more of a major problem for sustainable development than poverty issues. Bangladesh’s figure suggests almost four times less of a footprint than the world average. With the dual impact of climate change (sea-level rise in particular) WORLD Bangladesh

2.4 0.5

Ethiopia

0.8

India

0.8

Indonesia Philippines

1.1 1.3

China

1.6

Egypt

1.6

Thailand

2

Japan

4.3

France

5.1

Germany

5.2

United Kingdom

5.5

Sweden

6.5

Denmark

6.6

Australia

7.8

Canada

7.8

Finland New Zealand United States

8.4 8.8 9.8

Figure 12.2 Ecological footprint of selected developed and developing countries (hectares per capita)

170

South Asian economic development

and population growth, Bangladesh, in 2050, will be more vulnerable as a nation. By that time, almost 20 per cent of its 250 million people will likely become climate-refugees and will look for livelihoods in the highlands or overseas.

Concluding comments It is true that the extent of achievements South Asian nations enjoy in growth terms has never been witnessed before. However, in per capita terms the region remains dismally poor when compared with others (e.g. Southeast Asia and China). Almost 300 million people in India and almost 60 million people in Bangladesh live under US$1 a day. Indeed, development remains elusive to the poor people of these nations, which have been growing at a very high rate by historical standards. Moreover, it remains to be seen what further deterioration of quality of life will take place in South Asian populous nations due to the climate change and its aftermath. The affect of climate change has no bounds. Hence, this chapter has demonstrated that, although it is late, climate change is at the top of the agenda of the neighbouring regions of South Asia, the Southeast Asia and China. One may conclude, however, that, while South Asia has been growing on the back of globalization and exports (see earlier chapters) in recent years, it is now a reality that the climate change could take away the entire growth opportunity in the future. It is now time the governments of South Asian nations take initiatives, like China and Southeast Asia, and make a comprehensive plan to fight climate change in the years to come.

13 Information technology (IT) issues

It is now clear that the information technology (IT) industry has emerged out of three major sources: growth in information and communications technology (ICT), innovation of knowledge-based goods and services and globalization of economic activity. For the purpose of the present chapter, however, it is considered that the main drivers of the information industry all over South Asia are: information and communications technology (ICT), foreign direct investment (FDI) in IT/software services, and the emergence of IT-enabled services (ITES). The products of ICT and IT/software services are well known (Hossain 2003; Houghton 2003). But what exactly is the new ITES? In simple terms, it is the delegation of one or more IT-intensive operations to an external provider, who in turn administers and manages the selected business process based upon defined and measurable performance metrics (Nasscom’s Handbook 2002). For example, services provided either by outsourcing (i.e. external contract) or outlocating (i.e. remote subsidiary) of an offshore business, a foreign government or a multilateral entity based overseas. In other words, in recent years, Microsoft, some Departments of the US Government and the World Bank have outsourced software, accounting, data management and other services to India. It appears that the ITES have recently become the major source of outsourcing destination worldwide. There are three major areas of ITES that are generally considered for outsourcing (Nasscom 2002): Specialized ITES: medical transcription, legal database processing, online education, etc. General ITES: contract/call centres, telemarketing, consumer care, technical support, back office operation, and data processing. Business Process Outsourcing (BPO): contractual services to manage, deliver and operate business processes. (Hossain and Kathuria 2004)

Offshore outsourcing vs. outsourcing destination In recent years, there has been an intense debate taking place surrounding the issue of offshore outsourcing vs. outsourcing destination. It has been observed that

172

South Asian economic development

Table 13.1 The IT industry’s qualitative view on offshore outsourcing Item

Yes

No

Don’t know

Threat to local employment Good for global competitiveness Long-term danger to industry development Proactive strategy to cut expenditure World-class service Best value for money Necessary with lean budget

82 65 58 49 37 31 27

16 29 38 47 50 62 70

2 6 4 4 13 7 3

Source: Hollands (2004) Note % respondents (n = 100).

hundreds and thousands of jobs will be lost, for example, if the local businesses and governments in Australia opt for offshore outsourcing (see Table 13.1), while more and more jobs can be created if the local IT companies are competitive enough to attract offshore contracts. A recent qualitative study commissioned on the issue of offshore outsourcing by the Australian Information Industry Association (AIIA) in 2004 concludes the issue of outsourcing destination in the following manner: It is at least 25 per cent cheaper to run a commercial undertaking in Australia than in the United States or Western Europe. Therefore, many industry executives and commentators believe this nation can also become an offshore destination. Respondents said that domestic industry boasted world-class skills and experience to be able to provide a high level of consultancy than the process-oriented programming that has become the speciality of India, Malaysia, and a number of other countries in Central and South America, Southeast Asia and Eastern Europe. The ability of Australian software developers to solve problems, design and implement complex systems should attract business from North America and Western Europe. Vertical industry or domain expertise in areas such as financial services, government and health, are suits for the local software services community. Some respondents believed that for all the jobs lost due to offshore competition, it was possible for Australia to create an equal number by providing higher value services, thus increasing the value of the software sector of the economy . . . The ability of Australia to respond to this challenge and create employment as an offshore destination was the subject of intense debate. Many felt the industry lacked sufficient scale and strength to match the success of India in this arena . . . (Hollands 2004: 8)

Most preferred destination (MPD) India and Ireland were recognized as the most preferred destinations for IT and ITES in the world. There are eight criteria used for this purpose: government

Information technology issues

173

Table 13.2 Selected IT industry performance corresponding to macroeconomic performance in India and Ireland in early 2003 Parameter

India

Ireland

GDP growth rate (%) IT share of total exports (%) Employment in IT sector (’000) ICT exports (US$ for India and Euro for Ireland in billion) Number of companies

8.2 18.0 400 9.5 5,000

10 22 130 28 600

Sources: Nasscom (2004); Morrissey (2004)

support, labour pool, infrastructure, educational system, cost advantage, quality, cultural compatibility and English proficiency. On a scale of high, medium and low, India has a low score for infrastructure and cultural compatibility. Ireland scored low in labour pool but medium in cost advantage. Overall, both countries have been considered as having a status of a ‘most preferred destination’ (MPD) (Nasscom and McKinsey 2002). Table 13.2 provides some relevant information of the Indian and Irish industries in the early period of outsourcing (2003). The world has seen phenomenal transformation and scientific development over the last half a century. This period is also known as the age of industrial and ICT development in the OECD nations. The early part of the twenty-first century is dubbed as the ‘information and new economy age’ or the so-called ‘digital’ era. Among the countries in South Asia, India has been enjoying significant growth in the IT service area over the last two decades (see below).

Measurement of MPD By conducting a quantitative and qualitative analysis on the factors of MPD, it is possible to establish competitiveness of a country in the areas of ITES and BPO. The MPD approach involves two major components: to determine the market power of the economy and to determine the competitiveness of the economy. Each of these fronts is briefly addressed below.

Market power The market power of the industry can be established by analysing the markets of the IT industry products both domestically and internationally, taking three major areas into consideration: market share, ease of market entry and countervailing buyers dominance. The significant market power (SMP) approach developed and adopted by OFTEL (currently OFCOM) in the UK is of importance in this regard (OFTEL2003). This approach allows a company, a business entity or a regulator to determine the extent of competition that exists in a market.

174

South Asian economic development

Market competitiveness Determination of export competitiveness (i.e. outsourcing competitiveness) is the most important aspect of investigating any country’s competitiveness with ITES products. To address the competitiveness issue, three major areas can be analysed: competitive prices, profitability and cost advantage of the information industry. Quantitative models can also be developed to analyse the competitiveness issue (see methodology below). The outcome of this model can shed light on the comparative and competitive advantage of the exports of ITES and BPO. Conceptual framework This part of this chapter is concerned with the conceptual and methodological aspects of quantifying competitiveness of a nation in ITES and BPO exports. For example, it is now well established that India’s major strength in the competitiveness area is the cost advantage, which in turn affects both pricing and profitability of the export firms. Due to low price and low costs, India has been leading in ITES and BPO exports in the world. Since the telecommunications services (i.e. landline, mobile and internet) are considered the major inputs needed for the establishment of an ITES industry, it is essential to find out how to achieve optimal pricing of these services. It appears that in India there is still a room for achieving further efficiency in pricing landline (non-prepaid international calls), mobile calls and internet charges. The Ramsey pricing is believed to be the most efficient method of pricing from the viewpoint of economic welfare. However, it cannot be said with certainty that Ramsey pricing is a perfect method for achieving optimal prices for the telecommunications products. In the past, the UK regulator of telecommunications has undertaken a more refined approach to fix and generate further competition in the telecommunications market based on Ramsey (see OFTEL 2003). Methodology It must be emphasized first that the following models were initially developed for an Australian Research Council (ARC) Discovery Grant submission in 2004 (Hossain, Selvanathan and Selvanathan 2004). Ramsey pricing Bearing in mind the discussion above, one can conclude that economically efficient prices, that is to say Ramsey pricing, embody mark-ups that are inversely related to the price elasticity of demand of services. Such prices would maximize consumer surplus, the willingness to pay by consumers over and above the price they are charged, and allow firms to earn normal profit (Hunter et al. 2001). With this in mind, a demand model for three telecommunications services (landline, mobile and internet) can be developed (Hunter et al. 2001).

Information technology issues

175

Under the system-wide framework, the demand equation for commodity i in differentials takes the following form: Dqit = i + i DQt + 兺j ij Dpjt i = 1,2,3,4

(13.1)

Where the variables, Dqit is the log-change in consumption of commodity i; Dqt is the log-change in real income and Dpit is the log-change in price of commodity j. Where the coefficients, i is a constant term, i is the income elasticity and ij is the demand elasticity of i with respect to the price of j. These demand price elasticities would form a 4  4 matrix. When i=j, ij is the own-price elasticity of commodity i and when i  j, ij is the cross-price elasticity between commodities i and j. It is assumed that income and prices are predetermined for the estimation of the demand equations. Commodities i and j are linked to one another through the cross-price elasticity ij. For example, the equation representing the demand for landline (i=1) would be linked to the equation for the demand equation for mobile-off peak calls (i=3) through the cross-price elasticity (13). In other words, the demand for landline services depends on per capita income, its own call charges and the call charges of substitute services. Once the Ramsey pricing are known, they can be compared with the existing market prices and a conclusion can be drawn in terms of efficient price levels. In other words, the gap between the existing price and the estimated optimal price via the Ramsey method can be established. Cost efficiency To investigate the cost-efficient operation of a firm, it is a common practice to identify the cost-efficient frontier of the group of firms producing the same product and then identify the firms which are operating above the cost-efficient frontier (Baldwin and Cave 1999). The cost function can be estimated from cross-sectional data, time series data or panel data. A parametric function can be estimated using statistical methods. To estimate a cost function, information on output, total cost and input prices are needed. There are a number of functional forms used in the literature to specify the cost function. One such function is the translog cost function given by the following equation: ln(C) = 0 + 兺in = l i ln(pi) +  兺nj = l 兺nj = l Aij ln(pi)ln(pi) + 兺mi = l i ln(qi) +  兺in = l 兺mj = l Bij ln(qi)ln(qi) + 兺nj = l 兺mi = l ij ln(pi)ln(qi)

(13.2)

Where ln(C) is the (natural) logarithm of total cost, ln(pi) is the logarithm of the input price for input i, ln(qi) is the logarithm of the output quantity i, and i, i, Aij, Bij, ij are estimated parameters.

176

South Asian economic development

Measuring productivity Productivity is a technical relationship between output and inputs (e.g. labour and capital) in the production process. Productivity measures are used to establish how efficiently the growth of an industry is achieved. Productivity can be measured in various forms. One simple form of measuring productivity is the single-factor productivity where output is expressed as per unit single input. For example, labour productivity is measured as output per hour or per some other time frame. However, in real life there is a need to measure a multi-factor productivity where output is expressed as per combined unit of inputs. For example, output per combined unit of labour, capital and energy (Selvanathan and Selvanathan 2004). This will need an estimation of production function in its most general mathematical form: Q = f (x1, x2, x3 . . .)

(13.3)

Where Q = quantity of output; x1, x2, x3 etc. = factor inputs (e.g. capital, labour and energy). There are several ways of specifying this function, such as additive production function, Cobb-Douglas production function, constant elasticity of substitution production function (CES). By employing these models, it is possible to estimate the MPD of a nation with time series and cross-section data (Hossain, Selvanathan and Selvanathan 2004).

India’s competitive edge in information technology There are many factors behind the success of the Indian IT enterprizes. First, and most importantly, English language skills give India a major competitive and technological edge over other nations (Einhorn 2003). Second, more and more multinational companies are shifting their services to India, which can offer professional workers at low cost (Hussain 2003). Third, India gains job shift from more developed nations. For example, US banks and financial service companies are leading the way in outsourcing to India. It has been widely believed that the US companies have saved more than $6 billion in the past four years by outsourcing procedures (Raghunathan 2003). As stated earlier, there are many factors behind the success of the Indian IT enterprizes. However, the Kellogg School of Management (Hossain 2003) have identified five major areas: quantity and quality of IT workforce, strength of the workforce, increased productivity, low cost and English language skills. Table 13.3 presents a comparison of India with that of China in respect to some selected criteria of the industry. It is well known that by 2005, the IT market in China became largest in the Asia-Pacific region (excluding Japan), at more than US$38 billion, whereas India had US$15 billion. As far as the software and services exports are concerned, India achieved US$23 billion as compared to China’s mere US$1.5 billion. While India’s software exports have been cruising with sustainable pace, China’s capture of hardware export markets has been remarkable. In 2000, China’s

Information technology issues

177

Table 13.3 India and China: a comparison on selected criteria Criteria

IT market (hardware, packaged software and IT services) (US$ billion) Software and services exports (US$ billion) CMM (Capability Maturity Model) certified vendors

India

China

2000 2001

2005

2000

2001

2005

5.14

5.51

14.47

13.72

16.34

38.05

6.20

7.20

23.00

.30

.60

77

1.5 30

Source: Nasscom (various issues)

IT hardware exports was reported to be over US$24 billion, making it the thirdlargest IT hardware supplier to the world market (Nasscom 2002a). In other words, it appears that the two vast nations on earth have been enjoying a competitive edge in two major complementary areas of the IT market: hardware and software. The information economy sector of India has, without doubt, made significant contributions to the following growth areas: skilled labour force employment, exports of IT based products, attraction of MNCs to invest in IT and related businesses and so on. It has been established that the average revenue per employee in the industry reached US$17,500 per annum (INR 65,000 per month). The number of employees is currently estimated to be above 500,000. They are employed in more than 5,000 companies. By any standard, these are phenomenal growths within a period of only ten years. It has also been argued that the success of the information economy sector was made possible due to five major reasons: • • • • •

shortage of skills in Europe and US; abundant skills in India; availability of good quality skills; India’s ability to respond and deliver on time; cost advantage (India’s cost is one-half the cost of EU, one-third of typical US region and one-fourth of SV). (Nasscom 2004b)

Knowledge and innovation Knowledge superpower India’s current status of an MPD for IT outsourcing services is due mainly to its unprecedented achievements in the knowledge and innovation areas over the last two decades. In 2005, the New Scientist journal regarded India as a knowledge superpower. It says:

178

South Asian economic development India was ‘stealing’ jobs from wealthy nations – not industrial job, like those that had migrated to South East Asia, but the white-collar jobs of well-educated people. Today we know that the trickle of jobs turned into a flood. India is now the back office of many banks, a magnet for labour-intensive, often tedious programming, and the customer services voice of everything from British Airways to Microsoft. (New Scientist 2005: 10)

In fact, these are not the real reasons for India becoming a knowledge superpower. It is the recently established R&D labs for more than 100 Indian IT firms. This pushed India as a major partner in global scientific and innovative research. As mentioned earlier, India has been producing a huge number of engineering, computing and science graduates every year. One account suggests that the nation has more than 250 universities which cater to 3.2 million science and technology students. The IT outsourcing revolution in the last decade was the major source of employment of such a huge number of science and technology graduates. As a result, the IT industry’s contribution to GDP in recent years reached more than 4 per cent, compared to only 1.3 per cent in 1999. Rise of the middle class It has been claimed that the knowledge revolution was the major source of the rise of the middle class in India and it is estimated to be somewhere between 130 million and 286 million people. The emerging middle class is having an unprecedented impact on consumption pattern. For example, India, although a developing nation, experienced car sales rising by more than 20 per cent a year in recent years. In addition, it was mentioned earlier that growth in telecommunications in the last ten years has been extraordinary, particularly in the area of mobile phone services in both urban and rural areas. For example, Reliance Infocom, an Indian telecommunications firm, has recently laid 80,000 kilometres of fibre-optic backbone to connect the base stations making up its wireless network. This mobile infrastructure contributed to connecting more than 5,000 towns and 400,000 villages by the end of 2005 (Cohen 2005).

Economic and regulatory reform in telecommunications in India The economic reform agenda in telecommunications has been addressed in two policy documents produced in 1994 and 1999, popularly known as ‘National Telecom Policy 1994’ (NTP 1994) and ‘New Telecom Policy 1999’ (NTP 1999). These policies have been the major driving forces behind the success of the Indian IT industry. Let us examine these policies. National Telecom Policy 1994 A major programme was undertaken in 1991 to expand and upgrade India’s telecom network. The programme includes: complete freedom of telecom equipment

Information technology issues

179

manufacturing, privatization of services, liberal foreign investment and new regulation in technology imports. Simultaneously, the government-managed Department of Telecommunications (DoT) was restructured to remove its monopoly status as the service provider. Most value-added services, including cellular phones and radio pagers, which were virtually non-existent in the pre-reform era, have grown at an unprecedented rate (Hossain 1998). The government programme was formalized in a telecom policy statement called ‘National Telecom Policy 1994’ on 12 May 1994. The major provisions incorporated by the NTP 94 are: • • • • • •

to allow new entrants to provide basic telephone services to supplement DoT’s service; to maintain DoT’s status as sole provider of long distance services, confirming that DoT will remain a government Department; to set targets for providing all villages with access to a telephone by the end of 1997; to endorse the existing policy whereby the private sector will be the main provider of value-added services; to encourage pilot projects which envisage inflow of new technology and management techniques, generally involving foreign investment; and to indicate that a mechanism will be set up to protect consumer interests and ensure fair competition. (Hossain 1998: 218)

What was the outcome of NTP 94? Compared to the commitments and provisions endorsed by the 1994 statement, the outcome was less satisfactory. Only a handful of the targets set by this policy agenda were achieved. For example, as against providing one Public Call Office (PCO) per 500 urban Indian population and the telephone coverage of 576,490 villages in India, the DoT has achieved an urban penetration of one PCO per 522 and has been able to provide telephone services to only 310,000 villages. However, the DoT also has provided 8.73 million telephone lines against the eighth Five Year Plan target of 7.5 million telephone lines. (Selvarajah 2000: 68) Overall, NTP 94 was not sufficient to make India’s telecommunications sector fully open and liberalized. The incumbent monopoly (DoT) was indifferent to implementing the national telecom policy effectively, due to its lack of commitment and also due to instability at the Centre (that is, there were frequent changes of governments) over 1994 and 1998. This paved the way for designing a new policy framework for telecommunications called the ‘New Telecom Policy 1999’ (NTP 99), which was delivered by the new government led by the Bharathiya Janata Party (BJP) coalitions.

180

South Asian economic development

New Telecom Policy 1999 The New Telecom Policy 1999 (NTP 99) was developed as the backdrop of three major events witnessed by the Indian economy after the reform process began in 1991. First, although NTP 94 was a right step towards bringing reform in the telecommunications industry, it failed to achieve its desired goal until 1997. Second, the coalition government of Atal Behari Bajpai, led by the BJP, brought stability to the central government when it came to office in 1998. Third, immediately after assuming power, the BJP-led government was keen to bring further reform in telecommunications to attain an effective and efficient communications sector. In order to achieve this, the BJP-led coalition government immediately formed a high-powered committee to develop the Internet Services Development Policy headed by Chief Minister Chandrababu Naidu. The commitment of this committee and the major interest of the Prime Minister in transforming the telecommunications sector gave birth to the NTP 99 for the Indian telecommunications sector. According to Selvarajah: Overall, the NTP 99 is a comprehensive and progressive telecom policy framework. It addresses the outstanding issues of telecommunications development and the challenges of modern telecommunications technology. NTP 99 recognises the crucial role of private sector investment in the development process of the sector and to bridge the much-needed financial resources gap. (2000: 69–70) Among other things, the NTP 99 has endorsed policies under five policy frameworks: • • • • •

Framework for Services Deployment; Framework for Licensing of Telecom Services; Framework for Restructuring of Telecom Organizations; Framework for Further Liberalization of Services; Framework for Regulation.

India’s economic reform in telecommunications goes hand in hand with regulatory reform from the early 1990s. Telecommunications regulatory reform in India can be divided into two categories: reform introduced under the NTP 94 and reform introduced under the NTP 99. The section below presents reform measures, taking these two documents into consideration. The regulation began with the introduction of an independent regulatory agency called the ‘Telecom Regulatory Authority of India’ (TRAI) in March 1997. NTP 94 had a provision to introduce such an independent entity to regulate telecommunications in India. It was felt that such an authority was needed due to ongoing liberalization and economic reform introduced to the industry following the government’s publication of NTP 94. Among other things, NTP 94 has brought the following changes to the industry:

Information technology issues •

• •

181

New entry for basic telephone services will be permitted as duopolies (that is, DoT and one other operator) in the 21 ‘Circles’ into which the country has been divided; DoT will retain the long distance monopoly for five years, after which the decision would be reviewed; and Foreign ownership of telecom operators will be welcome up to 49 per cent of equity. (World Bank 1995: 104–5)

With all these changes in place, an independent regulator for the industry was overdue. The Telecom Regulatory Authority of India Act 1997 established the TRAI in January 1997 with a view to provide an effective regulatory framework and adequate safeguards to ensure fair competition and protection of consumer interests. To achieve the objectives of the TRAI Act, TRAI was given power to give directions to service providers, make regulations, notify tariffs by Order and adjudicate disputes arising between the government (in its role as service provider) and any other service provider. Among all the powers and duties, its authority and jurisdiction to settle disputes among the service providers has been important. However, there was a ruling by Delhi High Court against the TRAI about its power and jurisdiction in July 1998. The High Court ruled, ‘it was not mandatory for the Indian government to seek recommendations of the TRAI prior to issuing licences for telecommunications services in the country’ (quoted in Selvarajah 2000: 71). The judgement affirmed the powers of the DoT (i.e. the government) to issue licences without recommendations from TRAI. It also clarified that TRAI did not have the power to override the licence conditions. The High Court concluded that ‘the powers of the TRAI cannot be construed as a precondition precedent to the exercise of any other powers by the DoT on behalf of the government under the Indian Telegraph Act No. 13 of 1885’ (quoted in Selvarajah 2000: 71). With this ruling in place, the new and the independent telecom regulator in India had a controversial and bumpy start. In addition, another High Court judgement in January 2000 observed that the TRAI Act 1997 did not empower the regulator to fix interconnection terms and conditions between service providers, and that TRAI had merely a policing function in this regard. This meant that the Calling Party Pays (CPP) regime for cellular mobiles that TRAI sought to introduce in November 1999 that specified inter-alia explicit revenue shares for calls from Basic to the cellular network could not be implemented. Soon after this judgement, the TRAI Act was amended and a new Act, the TRAI (Amendment) Act 2000, was introduced. These episodes of conflict between the incumbent and the regulator undermined the credibility of the regulator during the initial years of telecom liberalization in India. Prior to this, DoT was responsible for the industry regulation as a part of government operation. According to Selvarajah, ‘overall, the TRAI has the powers and functions of a typical telecom regulator’ (2000: 71). It appears that, in practice, TRAI faced major hurdles in functioning appropriately in the initial period due to some High Court rulings sought by the DoT about the jurisdiction and obligations of TRAI. This

182

South Asian economic development

has made TRAI less effective and has forced a process of continuous transformation in the early years. The next section provides a brief overview of the players in regulation as it stands in India today. Players in regulation India’s telecommunications sector is regulated by the Ministry of Communications through three government bodies: the Telecom Commission, DoT, and TRAI. The Telecom Commission performs the executive and policy-making function, DoT is the policy-implementing body and TRAI performs the function of an independent regulator. Department of Telecommunications (DoT), Ministry of Communications The DoT, Ministry of Communications, is the authority in India that looks after the licensing and overall policy-making. Until recently, DoT was also the main service provider. This role, however, has been separated from DoT, and is now functioning as a corporate body, Bharat Sanchar Nigam Limited (BSNL). Two other government corporations are also established as service providers. Mahanagar Telephone Nigam Limited (MTNL) operates in Mumbai and Delhi with licence for, inter alia, basic service, cellular mobiles and internet access. Videsh Sanchar Nigam Limited (VSNL) has a monopoly in the international call segment and a licence for providing some other services, including the internet. The government is a major shareholder in both MTNL and VSNL, and has substantive control over the decisions of these service providers. In fact, they may also end up competing with each other for the same market. This has already started happening in certain cases, for instance, with MTNL and VSNL for the internet market. A competitive situation was required greater autonomy for MTNL and VSNL. Telecom Regulatory Authority of India On 24 January 2000, an Ordinance amended the TRAI Act 1997 and altered a number of aspects. For example, the adjudicatory role of the TRAI has been separated and has been provided to the Telecom Dispute Settlement and Appellate Tribunal (TDSAT). TDSAT has been provided the powers to adjudicate any dispute between a licensor and a licensee, between two or more service providers and/or between a service provider and a group of consumers. TDSAT has been the given additional powers it inherited from TRAI. For example, it can settle disputes between licensor and licensee. Further, the decisions of TDSAT may be challenged only in the Supreme Court. The remaining functions (e.g. with respect to powers relating specifically to interconnection conditions) of TRAI have been better defined and expanded in the TRAI Act 2000. TRAI now has the power to ‘fix the terms and conditions of inter-connectivity between the service providers’ (TRAI (Amendment) Act 2000), instead of ‘regulating arrangements between service providers of sharing revenue from interconnection’ (TRAI

Information technology issues

183

Act 1997). The new legalization signalled an attempt to re-establish a credible regulator. The government would be required to seek a recommendation from TRAI when issuing new licences. The adjudication of licensor–licensee disputes would be undertaken by an independent tribunal specializing in telecom. In terms of interconnection arrangements, TRAI was given the powers to override the provisions of licence agreements signed with DoT. However, while there has been an increase in the powers of TRAI (other than dispute settlement), the Ordinance has led to a weakening of the guarantee that was provided in the Act with respect to the fiveyear working period for the TRAI chairman and members. This statutory guarantee was done away with by the Ordinance, which provides for less stringent conditions for removal of any member or chairman of TRAI. To that extent, the independence of TRAI has been whittled down. More on TRAI is provided in the next section. Since the regulatory outcome of the NTP 94 had been disappointing, the government proposed new regulatory policies in its NTP 99 policy statement. The regulatory reform introduced by the NTP 99 can be summarized as follows: • • • • •

Reaffirm the commitment for a strong and independent telecom regulator; Arbitration powers given to the regulator in settling disputes between the government and other service providers; Licensing and policy making will, however, continue to fall under the government’s jurisdiction; Prohibition of the provision of voice services over the Internet Protocol; Recognition of the need for changes in the existing telecom legislations. (Selvarajah 2000: 70)

NTP 94 spelt out five basic objectives of which two objectives, (1) availability of telephone on demand and (2) universal service (connecting all villages), were targeted to be realized by 1997. Both of these objectives remained unrealized. In regard to (3) quality of service, matching ‘world standard’ and providing the ‘widest possible range of services’ ‘at reasonable prices’ were stated aims. Two other objectives were (4) to make the country a major manufacturing base and exporter of telecom equipment and (5) to ensure the country’s defence and security needs. The powers of licensing and spectrum management were retained by the government on the grounds that both need to be strictly monitored in order to protect the strategic interests and security of the country. There were serious gaps in the policy document with respect to provision of a suitable environment for entry of private service providers and on the issue of meaningful regulation. The NTP 94 policy was designed with the fact in mind that services should continue to be largely provided by a strong incumbent that faced little competition. The same view seems to be reflected in the ‘guidelines’ for the selection of private basic service operators. Efforts to involve the private sector under NTP 94 encountered certain obstacles. In addition, while major targets were specified in NTP 94, an accurate assessment of the underlying resource requirements (e.g. to realise the enunciated objectives, an estimated INR) was not

184

South Asian economic development

done. Two hundred and thirty billion INR of additional resources were required. A need for private sector contribution to the effort was clearly recognized, but various implementation problems, including incomplete reforms, mitigated the efforts to achieve the targets. Meanwhile, convergence arising due to changes in technology and the overall market structure for service provision had changed and there was a need to provide fresh directions through another policy. The opening up of the internet sector setting the background to NTP 99 was a major attempt to plug the loopholes in the NTP 94 policy. Its policy objectives in themselves are marked improvements. Provision of universal service (including unconnected rural areas which were re-targeted for the year 2002) was sought to be balanced by the provision of sophisticated telecom services capable of meeting the needs of the country’s economy. The latter objective was further amplified to include the provision of internet access to all district headquarters (DHQs) by 2000 and the provision of high speed data and multimedia capabilities to all towns with a population of 200,000 and above by 2002. Apart from a target average penetration of 7 per cent by the year 2005 (and 15 per cent by 2010), targets for rural teledensity were set to increase from the current level of 0.4 per cent to 4 per cent during the same period. To meet these teledensity targets, an estimated capital expenditure of INR 4,000 billion for installing about 130 million lines would be required. Recognizing the role of private investment, NTP 99 envisages multiple operators in the market for various services. The most important change has been a shift from the existing licence fee system to one based on a one-time entry fee combined with revenue share payments. Whereas NTP 94 only acknowledged the need to enlist private participation in a big way into value added as well as basic services, and to ‘ensure fair competition’, NTP 99 goes further in targeting a greater competitive environment and level playing field. Other regulations include, for instance, a limitation on sub-licensing, a limitation on transferability of shares for a specified period (of five years) and the licensee being treated as a defaulter when there is a non-compliance of any licence condition. It must be borne in mind that, over time, the government has made attempts to remove restrictions that adversely affect performance of the licensee. For example, earlier there was a condition that the last mile linkage should be with copper wire only, but this condition has been relaxed. NTP 99 allows DoT/MTNL to enter as third cellular mobile operators in any service area if they wish to provide these services. To ensure a level playing field, DoT and MTNL will have to pay a licence fee, but DoT’s licence fee will be refunded because it has to meet the Universal Service Obligations (USO) guidelines. It is worth noting that to the extent that the fee will be specifically refunded to bear the cost of USO, this aspect should be accounted for when calculating the USO levy and apportioning the revenues from that levy. Some of the other notable advances marked by the NTP 99 are as follows: •

Speeding up competition in long distance, including usage of existing backbone network of public and private entities in rail transport, power and energy

Information technology issues

•

•

•

• • • •

• • • •

185

sectors for data (immediately) and for domestic long distance voice communication when the latter is opened to competition from January 2000. This opens up the scope for entry of a new category of infrastructure providers or ‘carrier’s carrier’; The Fixed Service Providers (FSPs) shall be freely permitted to establish ‘last mile’ linkages to provide fixed services and carry long distance traffic within their service area without seeking an additional licence. Direct interconnectivity between FSPs and any other service provider (including another FSP) in their area of operation and sharing of infrastructure with any other type of service provider shall be permitted; Policy to convert PCOs, wherever justified, into Public Teleinfo centres having multimedia capability like ISDN services, remote database access, government and community information systems, etc; Transforming in a time-bound manner, the telecommunications sector to a greater competitive environment in both urban and rural areas providing equal opportunities and a level playing field for all players; Strengthen research and development efforts in the country and provide an impetus to build world-class manufacturing capabilities; Achieving efficiency and transparency in spectrum management; Commitment to restructure DoT; Interconnect between private service providers in same Circle and between service provider and VSNL along with introduction of competition in domestic long distance; Undertaking to review interconnectivity between private service providers of different service areas, in consultation with TRAI; Permission for ‘resale’ of domestic telephony; Clarity regarding number of licences that each operator may be granted. (This could lead to consolidation of industry operators over the long term); and, Emphasis on certain other issues including standardization, human resource development and training, disaster management and change in legislation.

Concluding comments IT and related businesses have been the fastest-growing sector of the Indian economy over the last ten years. There is still an opportunity to grow further in the future. There are numerous lessons from the Indian experience. This chapter articulated at least three significant lessons for other developing nations of South Asia. First, the India telecom sector presents a picture of managed competition. While the traditional public monopoly is coming to an end, effective competition has been hard to achieve for a number of reasons. The incumbent with an extensive network has retained market power. The number of networks that have come up or are about to come up are limited because of the costs of building the network. The availability of spectrum is a constraint in the market, especially for cellular mobile services. Given these circumstances, however, the expansion of telecommunications services has been phenomenal over the last decade.

186

South Asian economic development

Second, new market-based approaches to the supply of telecommunications services have been introduced in India. Technological changes have led to cost reduction and expanded the scope of product choice. The number of initiatives on the drawing board makes for impressive reading and immense opportunity for the sector and thus for the economy. TRAI has already issued consultation papers on internet telephony and interconnection and the opening of international long distance (ILD) services to private competition. These initiatives suggest a greater reliance on market forces than before. As market-based approach to the provision of telecom services has been adopted, the question to be addressed is whether there should be more or less regulatory intervention. Third, under the given market-based approach and the current regulatory framework in place, the telecommunications industry has contributed to establish a ‘new’ sector in the economy that is driven by IT/software and ITES. Within a short period of time, the information economy sector has substantially contributed to reversing the age-old current account problem and has created hundreds and thousands of jobs in newly established domestic companies and in India-based major MNCs. These make the recent higher achievements in growth in India a reality that is, by all means, sustainable. These achievements, however, are not immune from future threat. The major challenges can be identified in terms of India’s image problem to outside world, gradual withdrawal of tax incentives in place, WTO intervention on behalf of the other member nations and direct competition faced from Southeast Asian nations, including China.

Part III

South Asia in the twenty-first century

14 India’s growth on the back of the information revolution

The current IT boom in India: Why did it happen? During the past two decades, India has moved away from its former ‘command and control’ policies to become a market-based economy. This process started in the mid-1980s and gathered substantial momentum at the beginning of the 1990s. The process of reform has continued in this decade with a further opening of the economy and the creation of regulatory institutions to oversee the march towards fully competitive markets. As a result of the liberalization, GDP per capita has been rising by 7 per cent annually, a rate that has led to its doubling in a decade. This contrasts with annual growth of GDP per capita of just 1 per cent in the three decades from 1950 to 1980. Rapid growth turned India into the third-largest economy in the world in 2006 (after the US and China and just ahead of Japan when measured at purchasing power parities), accounting for nearly 7 per cent of world GDP (OECD 2007). Although India’s growth rate has been among the highest in the world, it remains a low-income country. With a per capita income of US$950 in 2007, India ranks number 122 (World Bank World Development Report 2008). As well as a low average income, there are substantial disparities in economic performance between states. The average per capita gross state domestic product (GSDP) of Delhi, the richest state, is five times that of Bihar, the poorest state. There is a broad consensus amongst policymakers that growth needs to become more inclusive by increasing the prosperity of poorer states, whose economies have expanded at a slower pace than those of the richer states in the past decade. Previous research suggests that the differences in economic performance across states are associated with the extent to which they have introduced marketoriented reforms, alongside measures to improve infrastructure, education and basic services (Ahluwalia 2000). The physical infrastructure (or lack thereof) is widely acknowledged to be one of the crucial impediments to achieving higher and more inclusive economic growth in India. The lack of adequate infrastructure is particularly acute in rural areas, home to 70 per cent of India’s population and the 52 per cent of the work force that is primarily engaged in agriculture and related activities (Government of India 2007–08). Agriculture in India accounts for 18 per cent of national income,

190

South Asia in the twenty-first century

implying extremely low agricultural productivity. The resulting migration of excess farm labour to urban areas in search of jobs is straining the urban infrastructure and increasing the population living in city slums. India’s urban population is expected to double (to 575 million) over the next two decades. Any strategy that seeks to address the problem of inclusive growth will therefore have to contend with the harsh realities of low productivity in the countryside, a massive movement of people to the cities and extensive poverty in both rural and urban areas. Past policies have not had much success, often being defeated by the magnitude of the problem as well as by weaknesses in their implementation. But the message is clear. Rural productivity needs to increase as part of the development process and to raise incomes for millions of Indians who live below the poverty line, in the countryside and the cities. A sustainable faster rate of growth can only be achieved by improving productivity, but underinvestment in infrastructure is an important barrier. India plans to roughly double investment in infrastructure to $500 billion over the next five years, or about 8 per cent of GDP each year. The Planning Commission maintains that the growth target of the Eleventh Plan (2007–12) is achievable only if the ‘infrastructure deficit can be overcome and adequate investment takes place to support higher growth’ (Planning Commission Report on Infrastructure Development 2006). The government expects private investors to contribute two-fifths of the total investment in infrastructure, not only to expand capacity, but also to improve the quality of service. The telecommunications sector has had the most success in attracting private investment and is often held up as an example for other infrastructure sectors (Planning Commission Report on Infrastructure Development 2006). Two familiar reasons for this status are worth repeating. First, India’s teledensity has shown extraordinary growth since private participation in the sector was introduced, rising from less than 1 per cent in 1998 to over 30 per cent today. Second, several research studies have found that the telecommunications infrastructure is one of the significant factors in economic growth, alongside other factors such as overall investment, education, energy and transportation networks (Madden and Savage 1998; Datta and Agarwal 2004). The change in India’s telecoms landscape has been dramatic. In 1994, the year the National Telecom Policy was drafted, fewer than one in 100 Indians owned a phone. Public sector executives working for the incumbent monopoly were highly popular, given their ability to short circuit the endless waiting time for the privilege of owning a telephone. Less than 15 years on, teledensity has increased to more than 32 per cent and subscriber numbers are growing at a rate of about 10 million per month. Ownership of a phone is no longer the result of who you know, but rather conforms to the conventional forces of supply and demand. Waiting lists are down and voice calls in India are amongst the cheapest in the world. The government’s target of 250 million phones by the end of 2007 was reached, quite unexpectedly, ahead of schedule (NTP 1999). One of the objectives here was to extend earlier studies by analysing the growth impact of telecoms in India. While the telecoms-growth link has been explored

India’s growth on the back of the information revolution

191

across different countries and within a particular country over time, few studies have assessed the relationship at the sub-national level. India’s federal structure, with some states such as Uttar Pradesh, Maharashtra and Madhya Pradesh larger in geographical area and population than most European countries, readily lends itself to such analysis. Moreover, balanced regional development has always been an objective of India’s plans. Therefore, studying the impact of telecoms liberalization across states will provide valuable insights for this policy aim. The rapid spread of mobile telephony in India is the most obvious manifestation of the benefits of telecom sector liberalization. Fixed-line penetration is in fact showing signs of decline, and future growth will come from mobiles. Given that about 10 million wireless subscribers are being added every month, the impact of telecoms on state-level growth rates can be explored through the impact of mobile telephony. This chapter accordingly attempts to answer three questions: What is the impact of mobile penetration on state growth rates? Do less-developed states show a greater impact of mobile penetration? What are the links through which mobile telephony affects growth and what are the constraints, if any, which limit its impact? The first two questions are addressed by employing top–down econometric analysis using state-level economic indicators, while the third question is addressed using bottom–up evidence from surveys and other information. The next section briefly reviews the existing literature on the impact of telecoms on growth. The subsequent section assesses India’s regulatory and competitive landscape for telecoms and compares Indian mobile telephony indicators with those of some other countries. The descriptive statistics presented in this section underscore the phenomenal progress made by mobiles in India, both when judged against past performance and when compared with other countries. They also show that India still lags behind other countries in important ways. Disparities in mobile penetration across states and between urban and rural areas are also examined. The penultimate section presents and analyses the results of the econometric model and also draws upon survey-based evidence to demonstrate the positive impact of mobiles on growth – the first such estimates to confirm the growth dividend of mobile usage in Indian states. The final section offers some conclusions.

The impact of telecommunications on economic growth: India as a role model A number of earlier studies have examined the relationship between telecommunication services and economic growth. There is a positive relationship between GDP per capita and telephone density indicators. The data for all countries, from the least developed to the most industrialized, generally fall within a small band along a straight line. A similar representation for mobile teledensity and per capita GSDP across Indian states (see Figure 14.1) also reveals data tightly clustered around the line of best fit. Noting the high correlation between telecoms penetration and growth, early research focused on the potential role that telecommunications played in accelerating growth and economic development. For instance, Hardy (1980) uses data

192

South Asia in the twenty-first century 80

Mobile penetration

70 60 50 40 30 20 10 0 20,000

30,000

40,000

50,000

60,000

70,000

Per capita GSDP

Figure 14.1 Mobile density and per capita income across Indian states

from 15 developed and 45 developing countries for the years 1960–73 and estimates a single equation in which GDP per capita is modelled to depend upon lagged GDP per capita, lagged teledensity and the number of radios. The results indicate that the greater availability of telephones had a significant positive effect on GDP, while radios did not. The differential impact of telephones vs. radios was interpreted as evidence of the network effects of telecommunications. A similar study by Norton (1992), using data from a sample of 47 countries for the postSecond World War period until 1977, found a positive and significant impact on growth, interpreted as being due to the fact that telecommunications were reducing transaction costs, increasing the efficiency of investment markets and consequently leading to increased investment levels. In both these studies, the biggest effect of telecommunications on growth was found in less developed economies. The implication of this result is that we might expect the relationship between mobile teledensity and economic activity across Indian states to vary with the level of development of each state’s economy. One flaw in these early estimates of the large growth impact of telecommunications is that causality will clearly also run from income level to telephone penetration, and ignoring this two-way impact exaggerated the results. A series of papers by Cronin et al. confirmed the existence of a two-way relationship. Cronin et al. (1991) found that telecommunications investment enhances economic activity and growth, while economic growth stimulates demand for telecommunications infrastructure investment. In another study at the state and sub-state levels for the US, Cronin et al. (1993a) established that the same relationships operated at the sub-national level. Cronin et al. (1993b) then analysed data between 1958 and 1990 for the US, taking account of the two-way causality, and found that contributions to aggregate and sectoral productivity growth rates from telecoms investment are both quantifiable and substantial. Röller and Waverman (1996) were the first to quantify the impact of telecoms on growth after controlling for the

India’s growth on the back of the information revolution

193

effect of rising GDP on demand for telecoms. They explicitly addressed this ‘endogeneity’ problem by estimating a four-equation structural economic model with an aggregate production function, telecommunications demand and supply functions, and a telecommunications production function using data from 35 countries for the years 1970–90, controlling also for country-specific characteristics that might be correlated with a given country’s telecom infrastructure. They also specifically allow for non-linear effects, whereby at a certain critical mass network effects amplify the impact of telecoms on growth. This landmark paper finds that, in their sample of both developed and developing countries, a 10 per cent increase in the penetration rate leads to a 2.8 per cent increase in GDP and, further, that a minimum threshold of telecom density (of around 24 per cent) must be achieved in order to generate growth. In a later paper (2001) they find that about one-third of the economic growth for a cross-section of 21 OECD countries over the same period could be attributed to growth in telecommunications infrastructure. In this study, the threshold teledensity or critical mass was about 30 per cent. Torero, Chowdhary and Bedi (2002) extend the Röller and Waverman model to include mobile phones. They use data from 113 countries over a 20-year period and also find a positive causal link from telecommunications to GDP. The effect in their work appears to be non-linear and is particularly pronounced for countries with a telecom penetration rate in the range of 5–15 per cent. The threshold at which the growth dividend of telecom begins to take effect varies across these studies. It does suggest, however, that increases in teledensity might not immediately generate higher growth effects in states with particularly poorly developed telecoms infrastructures. The telecoms density in certain states is so low that marginal improvements might not generate the desired growth effects – not until the critical threshold for network effects is reached. Thus, laggard states may require substantial investments in telecommunications infrastructure before they can benefit from the growth-generating effects of these technologies. This is supported by our results, as described below. It has recently become quite fashionable to adapt the Röller and Waverman framework for developing countries and particularly for estimating the growth dividend of mobile phones. Torero et al. (2002), Sridhar and Sridhar (2004) and Waverman, Meschi and Fuss (2005) are some examples. The growth dividend of investment in (fixed) telecommunications infrastructure in developed economies is now fairly well established. Since the growth of mobile phones in developing economies such as India, China, Brazil and others has been sensational, it raises the obvious question of whether mobile phones in developing economies are playing the same role that fixed telephony played in the richer economies in the 1970s and 1980s. Mobile phones are often the only means of communication for a large number of people. For example, the most recent numbers available for India reveal that while fixed-line penetration is roughly 3.5 per 100 and declining, the corresponding number for mobile stands at 28 per 100 and growing. Because mobiles substitute for fixed lines in developing economies, their growth impact should be stronger in developing economies than in developed economies, where mobiles complement the extensive fixed service. Waverman et al. (2005) use data on 92 high- and

194

South Asia in the twenty-first century

low-income countries from 1980 to 2003. They find that mobile telephony has a positive and significant impact on economic growth, and indeed this impact could be twice as large in developing countries as compared to developed countries. Mobile phones can perform in underserved areas and regions what fixed lines did in many other regions and countries over two decades ago: widen markets, create better information flows, create lower transactions costs and substitute for physical transport that is costly in both time and money. The value of a mobile phone can be particularly high because other forms of communication, such as postal systems, roads and fixed-line networks, are often poor in developing countries. At the same time, in many developing countries growth has been low due to a host of other reasons, such as poor governance, lack of capital, low skill levels and many others. It is unlikely that increased mobile penetration by itself will be able to alleviate these other constraints on growth. This caution is supported by case studies. For instance, Jensen states that: improvements in roads have lowered the cost of land transport, leading to more arbitrage by wholesalers on land . . . In other cases, poor quality roads may limit the ability of improvements in information (that is, mobile penetration) to enhance market performance since arbitrage remains prohibitively expensive. (Jensen et al. 2002: 62–74) The economic impact of mobiles is likely to be strongest when the absence or inadequacy of existing telecommunications facilities acts as a barrier or bottleneck to private economic activities and when enough other infrastructure exists to permit the effective use of telecommunications. There is no study that systematically investigates the growth impact of mobile phones at the sub-national level. India is ideally placed for such an analysis. First, there is wide variation in economic performance across Indian states. Second, mobile licences in India have been awarded for geographic areas which are, to a large extent, contiguous with state boundaries. The correspondence between a mobile telecom licence and a state boundary allows us to adapt the Röller and Waverman (2001) framework for Indian states. Third, the explosive growth of mobiles in India, especially in the last five years, should allow us to identify any impact on economic performance across states. An attempt is made here to quantify that impact and explain differences, if any, across states. Three caveats must be mentioned, however. First, mobile telephony in India is relatively young – the first licensee rolled out services in 1995, and it was not until 2003 that the service became available in all Indian states – so there is little real trend as yet. Second, since mobiles are so new, there has been extremely rapid growth in mobile penetration starting from zero. There could thus be a tendency to overestimate the impact of mobile on growth, despite controlling for other growth-generating variables such as capital, labour and education. Third, data at the state level for investment comparable to data at the national level obtainable from national accounts are simply not available. Likewise, employment data at

India’s growth on the back of the information revolution

195

the state level are not available. These data have been compiled from different sources described in the Appendices. The data problems lead us to be cautious in our interpretation of the estimates reported here. Nevertheless, the results show that the growth dividend of mobiles is substantial and policymakers will be well advised to harness its full potential.

Indian telecommunications across states The critical element in the development of the Indian telecommunications infrastructure has been the explosive growth of mobiles, which has benefited from a compelling technology and an increasingly liberal policy environment. It is a common sight to observe street vendors, rickshaw pullers and newspaper hawkers routinely talking on their mobile phones in cities. From being viewed as a luxury when it was first introduced, the mobile service is now used everyday by millions of Indians. The compound annual growth rate (CAGR) for mobiles between 1999 and 2008 in India has been 83 per cent, while that of fixed lines has been just 7.5 per cent, and the growth of mobile is accelerating, while the growth in the number of fixed lines is declining. In fact, in the last three years, the number of fixed lines has decreased. In March 2008, mobiles accounted for 86 per cent of all telephones in India, and by October 2008 this number increased to 90 per cent. Contrast this with the situation in 1999, when mobiles constituted just 5 per cent of all telephones. There are now over 325 million mobile users compared to about 38 million fixed users. Figure 14.2 shows the dramatic rise in the monthly addition to the mobile subscriber base. If the current trend continues, there will be over 540 million subscribers by the year 2010. This is truly remarkable, since no other ICT indicator comes close to mobiles in penetration level or rate of growth. Fixed line,

Brazil China

South Africa Pakistan India

Philippines Sri Lanka

100 90 80

%

70 60 50 40 30 20 10 0 2000

2001

2002

2003

2004

Figure 14.2 Growth of fixed and mobile subscriptions

2005

2006

2007

196

South Asia in the twenty-first century

Table 14.1 All-India fixed, mobile, internet and broadband penetration rates Mobile density

Fixed density

Internet density

Broadband density

27

3

1

0.4

Source: Authors’ calculation based on TRAI data; number per 100 population for March 2008

internet and broadband penetration in India remain very low at 3 per cent, 1 per cent and 0.4 per cent respectively (see Table 14.1). Particularly striking is the paltry broadband penetration rate despite a low threshold speed for the figures: any download speed above 256 kilobits per second (kbps) in India is classified as broadband, a level of service that would be seen as inadequate in most countries (Telecom Regulatory Authority of India 2007a). The number of subscriptions to broadband is woefully short of the target set by the DoT (see Table 14.2) (Telecom Regulatory Authority of India 2007b). The number of internet subscribers too would be significantly below the policy target, were it not for the rapid penetration of mobile internet. There are about 32 million mobile subscribers accessing the internet through wireless networks today, compared to about 11 million who access it through the fixed network. India seriously lags behind on broadband. Even the TRAI has conceded that its future targets are unlikely to be achieved, unless critical issues inhibiting broadband expansion in urban as well as rural areas are addressed. These include both policy and regulatory constraints (Telecom Regulatory Authority of India 2007b). Two notable implications follow from these developments. First, hitherto unserved or underserved people will, for the most part, gain access through wireless technologies, whether the services are described as fixed, mobile, voice or data. Second, given the importance of wireless to modern ICT infrastructures, it thus becomes crucial for the government to play a more effective role in managing scarce frequencies for optimal use. This is a point to which we return in the concluding section. The triggers for the massive increase in mobile penetration have been many. Factors such as price, income and tastes have all been important determinants. (This is explored more formally in the economic model set out below.) There has been an enormous decline in prices. The effective price per minute for an outgoing Table 14.2 Internet and broadband targets in millions of subscribers Year

Internet subscribers

2005 2007

6 (5.55) 18 (42.5, including 32 mobile internet users) 40

2010

Source: TRAI broadband recommendations Note Actual numbers in parentheses.

Broadband subscribers 3 (0.18) 9 (3.1) 20

India’s growth on the back of the information revolution

197

mobile call has dropped from Rs. 1.53 in 1998 to Rs. 0.68 today. This 98 per cent decline would be much higher in real terms. Another measure, the average revenue per user (ARPU), is around Rs. 250 per month, compared to about Rs. 1,550 in 1998 (Merrill Lynch 2004). At the current exchange rate, that is roughly US$5 per month, representing about 5 per cent of an average Indian’s monthly income. The launch of micro pre-paid and handsets priced at less than Rs. 1,000 (US$20) have further reduced entry cost to the subscriber and extended demand. In addition, consumer financing of handsets, facilitated by declining interest rates, allows one to spread the cost over manageable monthly instalments. Micro pre-paid allows recharge options for as low as Rs. 10 (US$0.20). Other features of pre-paid reducing subscribers’ entry costs include ‘lifetime validity’, full value recharge and special ‘on-net’ or ‘within network’ tariffs. Not surprisingly therefore, 95 per cent of new subscriptions are pre-paid, raising the total number of subscribers on prepaid from 76 per cent in 2007 to about 85 per cent at the end of 2008 (see Figure 14.3). Income (measured by GDP per capita) has doubled since 1998, also contributing to demand. India was not unique in its earlier embrace of a telephone monopoly, but deregulation started relatively late, in 1994, with the drafting of the National Telecom Policy (NTP 94). This saw the abandonment of the government-owned, verticallyintegrated structure of service provision which had led to low supply, high prices for certain services and a large segment of the population without access to services. Market entry by mobile operators was allowed, starting in 1995, but was at first limited to two operators per service area. The third mobile licence was reserved for public sector operators (MTNL and BSNL) and the fourth mobile licence was auctioned in 2001. Subsequently, in 2003, unlimited competition was introduced through a Universal Access Service Licence (UASL) that recognized the convergence of fixed and mobile technologies in providing access. It was at this point that the number of mobile connections took off. The introduction of the Calling Party Pays (CPP) regime also contributed. Of total telecom sector revenue of US$27.5 billion in March 2008, mobile telephony accounted for more than 50 per cent. Average growth in revenue during the past three years has been 20 per cent, making India the fastest-growing telecoms market in the world. The more than 10 million mobile phones being added each month are distributed among the major operators. Airtel, Vodafone and Reliance added the highest numbers of subscribers, with 2.03, 1.57 and 1.51 million new additions respectively in March 2008. Wireless service providers in India along with their respective market shares for March 2008 are shown in Table 14.3. The top six players in the mobile market have an all-India presence, while the others are regional. The top three firms are private sector, while the public sector BSNL ranks fourth. Strong competition has ensured a larger and more reliable network and far higher penetration than the public sector would have been able to do on its own. The Indian experience shows that, although it took several years for deregulatory measures to have an impact, in the end competition-driven network expansion resulted in services being provided to those who had been denied access in the public monopoly model. However, even after the monopoly of the

0

2

4

6

8

10

Micro prepaid takes off

Launch of 999 schemes

Oct 2005

Jan 2006

12

Penetratation in B & C circles

Figure 14.3 Number of new subscribers

New subscribers (million)

Sept 2005

Nov 2005 Dec 2005

Feb 2006 Mar 2006 Apr 2006 May 2006 Jun 2006 Jul 2006 Aug 2006 Sept 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007

Apr 2007

Launch of INR777 handsets/lifetime prepaid below INR500

Verification of subscribers

Feb 2007 Mar 2007

May 2007 June 2007 July 2007 Aug 2007 Sept 2007

India second largest wireless network in the world

Oct 2007 Nov 2007 Dec 2007 Jan 2008 Feb 2008

Highest ever addition in the month to date

Oct 2008

Subscriber base cross 300mn & teledensity 25%

June 2008

Mar 2008 Apr 2008 May 2008

July 2008 Aug 2008 Sept 2008

India’s growth on the back of the information revolution

199

Table 14.3 Mobile market shares March 2008 (%) Service provider

Market share

Bharti Airtel Reliance Vodafone BSNL IDEA Tata Teleservices Aircel Spice MTNL BPL HFCL Infotel Shyam Telelink

24.34 17.74 17.21 14.37 9.54 9.23 4.21 1.42 1.29 0.49 0.12 0.04

Source: COAI Note Figures are all-India shares, March 2008.

government-owned incumbent has been broken and the growth trajectory has increased, more is required if India wishes to close the gap with other comparable countries, as Figure 14.4 illustrates (adapted from Figure 14.2). The low teledensity is mirrored in the low mobile coverage in India. Developing countries that are larger than India in geographical area (e.g. Brazil and China) have achieved greater mobile coverage, while countries with lower per capita income (e.g. Pakistan) have realized higher mobile teledensity (see Table 14.4). Mobile airtime rates in India have dropped to a level unmatched anywhere else in the world (see Figure 14.5). At roughly 1 US cent a minute, the price is half of that prevailing in China and Pakistan. It is, therefore, difficult to isolate a single

Brazil China

South Africa Pakistan India

Philippines Sri Lanka

100 90 80

%

70 60 50 40 30 20 10 0 2000

2001

2002

2003

2004

2005

2006

Figure 14.4 Mobile penetration in India and comparator countries

2007

200

South Asia in the twenty-first century Table 14.4 Mobile coverage in selected countries 2007 (% of population covered by mobile network) Country

% of population

Pakistan Philippines South Africa Sri Lanka China Brazil India

90 99 99.79 95 97 91 60.9

Sources: ITU, World Telecom Indicators 2008

factor responsible for India’s low relative teledensity. One possibility is that it is due to India’s late start. By the time India launched mobile in 1995, China had 3.6 million subscribers and Brazil had 1.26 million subscribers. But this cannot be the only reason as the gap continued to expand until very recently. Although net monthly additions in India are the highest in the world today, the challenge is to ensure that growth does not slow, so that the gap between India and other countries is bridged sooner rather than later. This is all the more important given the results of our econometric work reported below, which show a positive and significant relationship between mobile density and income at the state level. Mobile access differs between states and between urban and rural areas, but the gap is less than for other technologies (Table 15.5). It is often claimed that competition between the states to attract investment, especially since the 1991 economic reforms, has widened the already huge disparities between them. The richer, better-administered and more literate states have proved more attractive than the

0.18 0.16 0.14

US$

0.12 0.1 0.08 0.06 0.04 0.02

Figure 14.5 Airtime rate per minute in selected countries

India

Pakistan

China

Philippines

South Africa

Brazil

0

81.67 69.65 73.45 90.86 76.48 76.88 69.14 66.64 67.91 60.47 60.41 68.64 55.52 63.25 56.27 63.74 63.08 63.25 47.00

55,673 307,713 196,024 191,791 44,212

275,045 342,239

104,097 222,236 176,645 294,411

443,436 155,707 78,438 173,877

%

sq. km

1,483 50,362 130,058 38,863

Literacy rate 2001

Geographical area

Sources: CSO; GoI; Census 2001; TRAI

Delhi Punjab Tamil Nadu Kerala Himachal Pradesh Maharashtra Gujarat Karnataka Haryana Andhra Pradesh Rajasthan WB and A&N J&K North East UP Madhya Pradesh Orissa Assam Bihar

States

Table 14.5 Indicators for individual states

22,941 21,649 21,700 14,113

28,309 23,943 26,789 17,036

32,239 20,787

42,785 43,681 41,826 31,001 49,193

67,661 44,350 36,344 39,370

Rs.

Per capita income 2008

17.91 16.61 16.18 12.21

24.44 22.32 18.80 18.33

30.83 26.96

39.29 37.46 35.31 34.12 31.90

111.60 45.27 45.10 41.44

Mobile subscribers September 2008 per 100 people

1.89 1.85 1.28 1.11

1.25 2.09 2.48 1.40

3.20 2.63

5.78 5.56 3.82 4.87 3.75

14.56 6.05 5.55 10.77

Fixed subscribers September 2008 per 100 people

2.58 0.26 0.17 0.1

0.76 0.54 2.87 0.26

0.92 0.61

0.54 0.35 0.97 1.3 0.78

8.23 1.39 1.58 1.99

Internet subscribers December 2007 per 100 people

0.74 0.06 0.05 0.03

0.2 0.07 0.04 0.06

0.31 0.11

0.12 0.08 0.36 0.62 0.19

2.5 0.4 0.72 0.45

Broadband subscribers January 2008 per 100 people

202

South Asia in the twenty-first century

Table 14.6 Coefficient of variation across states Mobile

Fixed

Internet

Broadband

0.66

0.77

1.04

1.16

Source: Authors’ estimates

poorer ones to investors (Table 14.6). Between 1999 and 2008, when the Indian economy grew at an average annual rate of 7.3 per cent, many richer states grew even faster: Gujarat at 8.8 per cent, Haryana at 8.7 per cent and Delhi at 7.4 per cent. Among the poorest and most populous states, Bihar grew at 5.1 per cent, Uttar Pradesh at 4.4 per cent and Madhya Pradesh at 3.5 per cent (The Economist December 2008). To a large degree, mobile density reflects the differences in per capita income across states. The simple correlation coefficient between per capita income and mobile density for 2008 is 0.87 (where 1 would indicate perfect correlation). The corresponding correlation coefficients between per capita income and other ICT indicators across states are also positive but not as large; between fixed and per capita income it is 0.8, for internet and per capita income it is 0.66, while for broadband and per capita income it is 0.62. Per capita income is, however, not the only determinant of penetration rate. A study published by Vodafone in 2005 reported that certain African countries that started early down the path of telecom liberalization (e.g. Gabon and Mauritius) had achieved mobile penetration rates that were surprisingly high given their social and economic indicators; and the converse is true for countries where there were no early private licences issued (e.g. Algeria or Nigeria) (Vodafone Policy Paper Series 2005). Such variations also exist across Indian states. For example, Haryana is the second richest state in India after Delhi, but it ranks ninth in overall mobile density, while Punjab and Tamil Nadu have similar penetration rates, although Punjab is 25 per cent more prosperous. However, Kerala has a relatively lower per capita income, but a very high mobile penetration rate. One explanation might be a large migrant population from Kerala working in the Middle East and wishing to stay in touch with family and friends. Metros, like Delhi and Mumbai, that had a distinct first-mover advantage, have achieved much higher mobile penetration rates. While the correlation of mobile density with share of service sector GSDP and literacy rate is positive (0.72 and 0.46 respectively), and with geographical size it is negative (–0.46), the phenomenon of the diffusion of mobiles, however, cuts across many of these obvious characteristics. There are too many differences across and within Indian states to identify robust explanations for differences in penetration and usage. However, competitiondriven network expansion has certainly driven airtime charges and ARPUs to extremely low levels (Figure 14.6). By September 2008, the median number of wireless operators in each state was six, with only one state having as few as four and the rest having five or more operators. The situation today is extraordinarily different compared to the late 1990s, when only a few states had access to mobile services, and the service itself was limited to the rich.

India’s growth on the back of the information revolution

203

As India’s economy grows rapidly, what will happen to the regional disparities? Mobile penetration is growing faster in states with the lowest current levels, showing a trend towards convergence. Internet and broadband penetration are even lower than fixed-line penetration (Table 14.7). The coefficient of variation across states for the four ICT indicators – mobile, fixed, internet and broadband – is the lowest for mobile, indicating greater uniformity between states than other ICT indicators. This evidence from Indian states is consistent with evidence of convergence in mobiles contrasting to divergence in access to other technologies elsewhere in the world. Interestingly, both internet and broadband availability in India have until now been associated with Public Switched Telephone Network (PSTN) infrastructure consisting of copper loops to subscriber premises. The cost of providing access through this platform is greater than for wireless and is influenced by the distance between the subscriber and the local exchange, the gauge of the phone wire and the type of technology. Providing high-speed broadband access through wireless is cheaper, but it depends on the availability and price of spectrum and the extent of backhaul network essential to provide services. Sufficient spectrum has not been made available to provide high-speed internet access. Further, given India’s landmass, the cost of creating backhaul infrastructure in rural areas is substantial and has been a significant barrier. Consequently, the growth of internet access and data services has been very sluggish. Broadband penetration is negligible and far short of the policy target. At a policy level, therefore, there is a need to recognize the significance of wireless in not only delivery of voice, but also data services. Growth in mobile telephony for voice services is important, but not sufficient to be competitive on a global stage. Despite the massive increase in mobile density in the last three years, access in India is still skewed toward urban areas, where much of the industrial base is located. Urban teledensity is seven times higher than in rural areas, which are home to 70 per cent of India’s population. In other words, two-thirds of the phones are in urban areas, where only 30 per cent of the people live. The urban–rural schism is in some ways starker than the gulf between states (Figure 14.7).

ARPU

MOU

Figure 14.6 Measures of mobile usage across states March 2008

W.B. & A & N

U.P.(E)

U.P.(W)

T.N.

Rajasthan

Punjab

N.E.

States

Orissa

Mumbai

M.P.

Maharashtra

Kerala

Kolkata

Kamatka

J&K

H.P.

Haryana

Delhi

Gujarat

Chennai

Bihar

A.P.

Assam

700 600 500 400 300 200 100 0

204

South Asia in the twenty-first century Table 14.7 A growth of mobile telephony in each state 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

J&K North East WB and A&N Himachal Pradesh Gujarat Andhra Pradesh Assam Tamil Nadu Bihar Orissa Madhya Pradesh Haryana Rajasthan UP(E) Punjab Kerala Maharashtra Karnataka UP(W) Chennai Kolkata Mumbai Delhi

268.35 149.97 141.43 121.46 113.21 110.92 110.80 109.34 108.60 107.05 101.04 100.75 100.39 92.57 92.26 87.85 85.01 81.67 79.91 64.60 62.35 55.06 53.20

Source: Author estimates based on TRAI data Note Growth rate is annual average from inception of mobile services in each state to March 2008.

It is therefore worth asking whether mobile technology could bridge the rural–urban divide in the same way as it is has the potential to reduce the divide between states. There are reasons for optimism on this score, although the gap is still wide. The strong mobile growth in 2007–08 occurred despite some signs of saturation in urban markets. This suggests that there is higher potential future growth in non-urban markets. The latest figures show that at the all-India level, urban teledensity (all attributable to mobile growth) increased by 34 per cent, while rural teledensity increased by 62 per cent from March 2007 to March 2008, the disparity reflecting the low rural base. Until now, the focus of mobile operators’ attention has been on the more lucrative urban markets. The high cost of infrastructure rollout in less dense rural areas and affordability barriers for the rural population are likely reasons. But there are signs this is changing. Infrastructure rollout in rural areas is now eligible for subsidy (described in detail below) and all major providers have reported future plans for expansion in rural India (Business India 2008). In addition, according to Dipankar Gupta, the village is not what it used to be: 70 per cent of India’s population, 56 per cent of income, 64 per cent of expenditure and 33 per cent of savings come from rural India (Gupta 2008). The rural share of spending on popular consumer goods and durables ranges from 30 per cent to 60 per cent (Market Information Survey of Households 2007). When examining rural data, it is

India’s growth on the back of the information revolution Rural

Urban

205

Total

70.0 60.0 50.0 40.0 30.0 20.0 10.0 Sept 2008

March 2008

March 2007

March 2006

March 2005

March 2004

March 2003

March 2002

March 2001

March 2000

March 1999

March 1998

March 1997

March 1996

0.0

Figure 14.7 Urban vs. rural teledensity

important to bear in mind that a small percentage of a large number is a large number. One per cent of rural India is 1.4 million households. Rural India therefore presents a huge opportunity, but it also represents a huge investment for telecoms operators. The key factor is the much lower population density of the rural areas; cost is driven largely by coverage (and area), while revenue opportunity is driven by population. There is no doubt about the potential of mobile technology in addressing the digital divide. Already there is more uniformity in mobile penetration between states and between rural and urban areas compared to any other ICT indicator. Helping the process along effectively will require appropriate regulation. The change in policy to allow use of the Universal Service Obligation Funds (USOF) to support rollout of wireless infrastructure in rural areas must be commended, even though it is delayed. In December 2006, the Indian Telegraph Act was amended, enabling USO support to all types of telegraph services, including wireless, instead of just supporting fixed service rollout. Accordingly, wireless infrastructure is now eligible for support from the USOF. While this represents a vast improvement, disbursement of funds has been painfully slow. In fact, the USOF has accumulated funds faster than it has disbursed them, raising serious questions about the size of the levy as well as the speed of use (Table 14.8). About 69 per cent of India’s 593,731 inhabited villages have access to wireless infrastructure and with about US$2.8 billion currently available in USOF, the government ought to be able to extend this coverage (TRAI 2008). The government also has an ambitious programme of covering 100,000 villages with internet kiosks under the National eGovernance Programme (NeGP) to, inter alia, provide citizen services. The initial impacts have not been encouraging due to, among other reasons, low internet penetration. With high bandwidth 3G services in the offing,

206

South Asia in the twenty-first century

Table 14.8 Universal service obligation funds (US$ million) Year

Opening balance

Funds collected as universal service fund levy

Funds disbursed

2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 Total

0 271 659 1,088 1,441 1,984 4,081

331 429 692 707 842 1,081 1,274

60 40 263 353 300 258

Sources: TRAI, Consultation Paper on ADC Note Figures are rounded to nearest million.

mobile could well prove to be the answer. Even marginal subscribers with low budgets use data services and will need more of those as 3G brings the power of multimedia and other broadband services. 3G will play an important role in catalyzing data and internet usage, as well as in more efficient use of spectrum. India is far behind the rest of the world as far as data services are concerned. Policy in India has focused too much on voice, and it is important to move away from regulation that revolves around voice calls in order to facilitate the provision of internet and data services.

The impact of mobiles on economic growth in India This section presents the first estimates of the impact of mobile penetration on economic growth across Indian states. The data consist of a panel of socioeconomic variables such as GSDP and its composition, population, investment, geographic area and number of persons enrolled in tertiary education for the period 2000–08 for 19 states. Most of the data are from official government sources and are described in detail in Appendix 14.1. Also gathered are data on a number of characteristics of telecommunication developments in individual states, such as fixed and mobile phone penetration, average revenue per line and average revenue per minute for both fixed and mobile, minutes of use on mobile and internet and broadband penetration. Some of these data (e.g. internet, broadband and revenue per minute) are available for only a few years and for only a few states. Appendix 14.2 provides summary statistics for the variables used in the study. As acknowledged in the introduction to this chapter, inadequate information is available in India at the state level. The limited dataset means that we should apply some caution to the results, but the basic message is clear and consistent with other research: communications matter significantly for the growth of emerging markets. The average growth rate for GSDP per capita for the period 2000–08 was about 7 per cent and for mobile density it was 92 per cent. Overall, GSDP is very strongly

India’s growth on the back of the information revolution

207

positively associated with the number of mobile phones (the correlation is 0.95). Given this high correlation, it is not surprising that a simple regression of GDP on mobile phones finds substantial effects, explaining about 90 per cent of the variance in GSDP. We therefore also estimated a structural model, slightly modifying the framework developed by Röller and Waverman (2001), described earlier. The model consists of three equations – an output equation, a demand equation and a supply equation – all estimated together to take account of the two-way causation between telecommunications and growth. The model is presented in detail in Appendix 14.3, along with detailed regression results. The key results of the estimation are: •

•

•

•

•

The coefficient on mobile penetration is both positive and significant and implies that 10 per cent increase in mobile penetration delivers, on average, a 1.2 per cent point annual increase in output, quite a high impact. The estimated demand equation shows mobile demand is highly sensitive to price with a negative relationship and positively correlated with increases in income. Both these links are highly significant. The own-price elasticity of mobile phones is minus 2.12, which implies that a 10 per cent price increase would reduce demand by roughly 21 per cent. On the other hand, fixed-line prices do not seem to have any impact on mobile demand. One possible explanation for this is the much greater availability and utility of mobile phones across the states, thus rendering demand for mobile phones to be independent of fixed-line prices. Only in high mobile penetration states does the impact of fixed-line price on mobile demand conform to the idea that fixed and mobile phones are substitutes, that is the cross price elasticity is positive and significant, but the magnitude is small. The positive and highly significant income effect (the income elasticity is 2.45) confirms that the causal relationship between telecommunications and economic growth runs both ways. In addition, the estimate suggests that mobiles are ‘luxuries’ (in the technical sense) since an income elasticity above one implies spending on mobile rises more than in proportion with income. This conclusion, however, needs to be tempered with the fact that some people surveyed reported higher expenditure on telecoms than on other items such as education and electricity, because they perceived it as a basic need and were willing to incur higher costs. At one level, this conflict reveals the difficulty of reconciling micro level survey evidence with macro evidence; at another it suggests that there may be certain other exogenous factors driving demand for mobile telephony, especially among people with low incomes. More than any other infrastructure, telecom networks are subject to ‘network effects’ meaning the growth impact might be larger whenever a significant threshold network size is achieved. This would imply that larger growth effects might be seen in those states that have achieved a critical mass in mobile infrastructure. We split our sample into high and low penetration states based on the median penetration level of 25 per cent achieved in 2008 to test whether

208

South Asia in the twenty-first century such nonlinearities in telecommunications exist. The coefficient is higher for high penetration states compared to low penetration states (0.13 versus 0.1), implying that there is a threshold for critical mass, which has significant policy implications.

Recommendations Despite the challenges, it is difficult not to have an acute sense that this is a momentous time for telecommunications in India. This sense is palpable in the sector as ten years after liberalization, multinational companies which left India are returning to bid for 3G licences. A unique combination of factors is now in play and could usher in a renewed period of growth for telecommunications and consequently enhance economic activity in the individual states. Past policies have delivered some important successes. However, India lags far behind comparator countries in telecommunications access, and there is huge untapped potential in certain states and in rural areas, and increasingly in poor urban areas. There is an urgent need to bridge the gaps. Differences in the diffusion of mobile telephony certainly appear to explain some of the difference in growth rates between states. States with higher penetration rates show a greater growth dividend, and if this gap persists, our results suggest that it will feed into significant differences in their growth rates in future, particularly as between those states which have and have not achieved a critical mass of telecoms penetration. If Bihar were to enjoy the same mobile penetration rate as Punjab, according to our econometric results, it would enjoy a growth rate that is about 4 per cent higher. The policy implication of this result is unambiguous: there would be a large payoff to increased teledensity in India’s lagging states and regions. The only realistic way to achieve this is through the wireless platform. Wireless has played a crucial role in extending access in India and the present rates of growth and levels of connectivity could not have been achieved without the massive expansion in mobile telephony. But their further deployment needs to be complemented with an improved regulatory and institutional environment. A poor policy and regulatory environment drives up the costs of supplying services and inhibits investment. Rapid expansion of mobiles, especially in low penetration states and regions, will make it possible for these regions to make progress. Our analysis suggests the need for institutional and regulatory policies that facilitate effective competition and support a rapid diffusion of mobile telephony.

Concluding comments Indian states with higher mobile penetration can be expected to grow faster, with a growth rate 1.2 per cent points higher for every 10 per cent increase in the mobile penetration rate. If Bihar were to enjoy the same mobile penetration rate as Punjab then, according to our results, it would enjoy a growth rate that is about 4 per cent higher.

India’s growth on the back of the information revolution

209

There is evidence of a critical mass, around a penetration rate of 25 per cent, beyond which the impact of mobile on growth is amplified by network effects. This means there is an important threshold for policymakers. As is borne out in many other studies, including this one, it is the level of telecoms penetration (not the growth) which contributes to economic growth. Past policy reforms have achieved rapid growth in mobile usage, but India lags well behind most other countries at similar stages of development. There is enormous variation between states, between urban and rural areas and between poor and rich households in the cities. Further reforms are needed to bridge these gaps. Effective competition, efficient spectrum management and a market-based policy framework are the key regulatory levers.

15 South Asia in the twentyfirst century Seeking ‘good governance’ in the era of the information revolution

This comparative study of the four major South Asian economies – Bangladesh, India, Pakistan and Sri Lanka – has reflected on the key problem areas that seem to be hampering the quest for development in these polities in the early part of the twenty-first century. These include: • •

• • • • •

low to moderate saving and investment; low level of human resource development (with the exception of Sri Lanka; however, at present this nation has been suffering from lack of resources due to a 25-year civil war); poor physical infrastructure; weak fiscal position of the government; significant reliance on generally inefficient state-owned enterprises (SOEs); insufficiently competitive domestic markets; moderate with international trade and investment.

The standard prescriptions for policy reform to cope with these key problem areas include: • • • • •

macroeconomic stability restored and sustained through greater fiscal prudence; privatization and deregulation, particularly in terms of the commanding heights of the economy (e.g. power generation, telecommunications and banking); trade liberalization (i.e. creation of a FDI-friendly climate and regional cooperation within the framework of multilateralism); more aggressive investment in the areas of basic health and primary education; decentralization and local government reforms.

Underlying the current discussions of key economic problems facing South Asia – and the policies for dealing with them – is the fundamental issue of the role of government. The state is overextended, seeking to regulate and intervene in areas in which it lacks competence. At the same time, it is failing to fulfil its core functions. This is a legacy of the ‘dirigiste doctrine’ – inward-oriented industrialization driven by the public sector. The result has been disappointing. Despite optimistic

South Asia in the twenty-first century

211

predictions by prominent economists in the 1960s of impending success, South Asia simply did not grow fast enough to make a significant dent on its pervasive poverty until the early 1990s. Things started to change after the mid-1990s. The region has been embarking on reforming the economies in a meaningful way since the early 1990s. In this regard, India’s reform process began in 1991 and it has played a major part in South Asia. Immediately, Bangladesh, Pakistan and Sri Lanka followed Indian-style economic reform for their respective economies for good governance.

First things first: understanding the principles of good governance From the perspective of an economist, the principles of good governance have an old pedigree: they go back to Adam Smith. The key notion is that the state has to fulfil some core functions that will either be inefficiently provided by the private sector or will not be provided at all. In a powerful re-statement of this well-known view, the World Bank observes: Five fundamental tasks lie at the core of every government’s mission without which sustainable, shared, poverty-reducing development is impossible: • Establishing a foundation of law • Maintaining a non-distortionary policy environment, including macroeconomic stability • Investing in basic social services and infrastructure • Protecting the vulnerable • Protecting the environment (1997: 4) It is a tragic fact that in many developing countries such ‘fundamentals’ either have not been provided or have been inefficiently provided. South Asia is no exception. As has been noted, governments have overextended themselves by getting involved in spheres of activity in which the private sector has a comparative advantage. As a result, scarce administrative and managerial resources and the capability of governments have been diluted. The central task is to re-direct the focus of governments in South Asia in order to ensure that the core functions of the state are efficiently provided. Once this is done, an enabling environment will be created for the implementation of the standard prescriptions for policy reform in South Asia. While the prescriptions of good governance are well known, the mechanisms for facilitating their implementation are not. It is neither desirable nor feasible to transplant an East Asian-style ‘benevolent dictator’ on South Asian soil. What is to be done?

Mechanisms for facilitating good governance The World Bank (2001) once again offers a clue, but it appears to be surprisingly coy in emphasizing that the mechanisms that they propose ensure that they are

212

South Asia in the twenty-first century

compatible with democratic and decentralized institutions. Hossain (2003) is more forthright in analysing a range of local government mechanisms for enhancing rural economic development with reference to Bangladesh (see Chapter 11). The subsequent discussion draws on these sources. The agenda for good governance in developing countries encompasses a range of diverse and complex issues, but the following propositions are worth emphasizing: •

•

•

•

•

Where state capability is weak and is prone to capture by powerful interests, a greater degree of insulation from such fractious forces may be offered through decentralization of local administration. The state should conserve its scarce administrative and managerial resources by re-allocating its non-core functions to the private sector, but at the same time it should guard against the abuse of market power by private actors. It is necessary to recreate and foster a bureaucracy (or civil service) that is not simply well-paid, well-trained and generally competent, but can lead and listen by operating within an accountable and transparent framework. Trade liberalization and regional co-operation within a multilateral framework, including provision of land transit facilities for advancing trade, have political benefits which reinforce their economic benefits. Effective policies for achieving MDGs and control of population are the major prerequisites for any progress in social and economic fronts and achieving a meaningful outcome of good governance.

All of these propositions have considerable relevance for South Asia and deserve amplification. Local governance through decentralization To develop a decentralization strategy, one must take into account an economy’s ability to fund a reform programme which is likely to attain a meaningful and sustainable outcome. A sustainable and practical strategy must be devised by keeping the following outcomes in mind (put forward by the World Development Report 1999): • • • •

devolving and transfering power from a centralized to a decentralized administration; devising appropriate functions and resources for a decentralized administration; developing electoral rules and accountability measures to implement decentralization; drawing an appropriate management plan for decentralized governance. (adapted from the World Development Report 1999)

In Bangladesh, a decentralization process of local administration has begun in 2008 (see Chapter 11).

South Asia in the twenty-first century

213

It was expected in this country that a meaningful devolution and transfer of power from the centre could proceed smoothly with establishing district and sub-district councils. Keeping the World Bank (1999) findings in mind, one is convinced that the major objective of the decentralized governance is to relieve the centre from governing the local bodies directly. Moreover, the objective is to transfer some power from the centre to the local bodies (e.g. legislative roles and giving up some development roles by the Members of Parliament to devolved authorities at local level). This measure is expected to drive the unscrupulous politicians out of politics. This objective can be effectively fulfilled under the present decentralization efforts in Bangladesh if a local government for a district is established and strengthened. Further strengthening of the newly elected sub-district council to function alongside presently run grassroot-level union council would bring the fruits of the decentralized governance to the doorsteps of the vast rural population of this nation (Hossain 2009). It is expected that Bangladesh’s decentralization efforts could become a role model for South Asia in the years to come. Private investment-led information revolution It is now well established that, during the past two decades, India has moved away from its former ‘command and control’ policies to become a market-based economy. The economic reform process has continued in this decade with a further opening of the economy and the creation of regulatory institutions to oversee the march towards private-driven, fully competitive markets. It has been also acknowledged that a sustainable, faster rate of growth can only be achieved by improving productivity, but underinvestment in infrastructure is an important barrier. India plans roughly to double investment in infrastructure to $500 billion over the next five years, or about 8 per cent of GDP each year. The government of India expects private investors to contribute two-fifths of the total investment in infrastructure, not only to expand capacity, but also to improve the quality of service. The telecommunications sector has had the most success in attracting private investment and is often cited as an example for other infrastructure sectors. Two familiar reasons for this status are worth mentioning here. First, India’s teledensity has shown extraordinary growth since private participation in the sector was introduced, rising from less than 1 per cent in 1998 to over 30 per cent today. Second, several studies have found that the telecommunications infrastructure is one of the significant factors in economic growth, alongside others such as overall investment, education, energy and transportation network (see Chapter 14). As Chapter 14 shows, a comprehensive development has been achieved in the telecommunications sector in India in the last two decades. This nation certainly is now stands as a solid example for the region for the following outcomes: •

In India, with higher mobile penetration this can be expected to contribute to growth of the economy even further, with an overall GDP growth rate of 1.2 percentage points higher for every 10 per cent increase in the mobile penetration rate.

214 •

•

•

South Asia in the twenty-first century There is evidence of a critical mass (around a penetration rate of 25 per cent), beyond which the impact of mobile on economic growth is amplified by network effects. This means there is an important threshold for policymakers. The positive and highly significant income effect presented in Chapter 14 confirms that the causal relationship between telecommunications and economic growth runs both ways. In addition, the econometric results suggest that mobiles are ‘luxury’ goods since an income elasticity above one (2.45) implies greater spending on mobiles rises than is in proportion with income increase. From the ICT sector, India’s earnings from exports in recent years have been phenomenal. In 2005, India’s software and IT services exports were US$23 billion against a mere US$6 billion in 2000.

Once again, it must be emphasized that India’s reform in telecommunications over the last two decades has been projecting the nation to outside world, including its neighbours, as a rare exemplar in engaging and receiving private investment and interest in overall economic growth of the nation. Role of the bureaucracy One could argue that a well-trained, well-functioning bureaucracy or civil service is a sine qua non of a modern economy. However, it is not the quality of the bureaucracy per se that matters. The incentive that bureaucrats face may make them either a productive force or a dysfunctional institution in an economy. Song (1994) draws attention to the highly meritocratic civil service – based on the nobility or Yangban – that grew up in ancient Korea. They became the bastion of reaction and tenacious supporters of the status quo. In more contemporary times, Krueger (1993a: 60, 158), in a review of the process of policy reform in developing countries, highlights the failure to sustain reforms – in many cases due to resistance by entrenched bureaucracies. Lal’s (1995) hypothesis of anti-business, ‘Brahmin’ bureaucrats in India is also rather similar to the concerns raised by Krueger. Another obvious point that needs to be made is that the civil service/bureaucracy is not a monolithic body. One can make a distinction between civil servants affiliated to ‘line’ ministries (specializing in a narrow portfolio, such as industries) and those closely involved in ‘strategic ministries’ which have a broad mandate (such as the Treasury). On the one hand, line ministries typically tend to be interventionist and prone to capture by special interests. Strategic ministries, on the other hand, tend to emphasize fiscal prudence and a more market-friendly approach. This observation applies even to highly successful East Asian economies such as Japan (Okimoto 1987) and Korea (Choi 1988). The reason why the strategic ministries in these countries were able, at crucial junctures, to override the interventionist tendencies of the line ministries can be explained partly by supraministerial forum for mediating inter-ministerial conflicts and partly because they enjoyed the confidence of the political leadership (see Choi 1988 on Korea). It also needs to be emphasized that bureaucracies have a natural predilection for secrecy. In Bangladesh, for example, documents pertaining to deliberations with

South Asia in the twenty-first century

215

aid donors and even background papers prepared by the donor community are typically classified as reports that cannot be disseminated to the public (World Bank 1996). This is largely a reflection of the incentive structure they face. Having been reared in an atmosphere of control and regulation, civil servants can easily develop an aversion towards the dissemination of information that contributes to the development of informed debate and discussion on policy issues. Such examples show that while one needs a well-trained bureaucracy in South Asia, a great deal also needs to be done to reorient the focus of South Asia by changing the incentive structure the countries face. This can be done in several ways. One obvious strategy is to have a tighter linkage between performance and pay and promotion so that ‘time-servers’ are penalized and those who generate results (based on agreed criteria and goals) are rewarded. Yet another mechanism is to include as a key component in the training programme of civil servants – mechanisms that enable them to appreciate private sector ethos and operations. Apparently, this is being implemented in India with considerable success (World Bank 1996: 138). Perhaps one of the most effective ways in which the bureaucracy in South Asia can be re-oriented to play a more productive role lies in the realm of accountability and transparency. This creates external pressures to reinforce internal systems that reward performance. Exposing the civil service to regular public scrutiny through the traditional instruments of democratic governments is certainly essential. This could be formalized by written commitments that entail a pledge – such as a Citizen’s Charter – by the bureaucracy to uphold standards of service according to easily monitorable criteria. This is a broader example of a range of private sectortype approaches that can be creatively adapted to the context of a bureaucracy in order to make it more accountable. A good example can be offered from the Philippines. In 1994, the Philippines Civil Service Commission (CSC) launched a campaign entitled ‘Citizens Now, Not Later’ (Sto Tomas 1995). The campaign involved: specification of norms of conduct and courtesy to clients; easy indentification of employees (through easily-read ID and obligatory introduction of serving officers in cases of telephone discussions with clients); and a telephone complaint system that was widely publicized by the media. The campaign has apparently been a success. The Philippine model is one of many that one can draw from different parts of the world of a bureaucracy that is evolving in a framework of accountability and transparency. South Asian governments can certainly learn much from such examples and adapt them to their particular circumstances. Finally, it needs to be noted that a broad movement that focuses on the core functions of the state and reallocates non-core functions to alternative delivery mechanisms (including, but not limited to, privatization) will help to demarcate the appropriate domain of the civil service. This will in turn facilitate the dismantling of a culture of regulation and control that has, over decades, transformed South Asian bureaucracies into dysfunctional institutions. This can be further illustrated by keeping the Bangladesh case in mind.

216

South Asia in the twenty-first century

On the subject of bureaucracy and overall public service, it puzzles the nation to see how, under the auspices of the cadres of political parties, the purpose of public service has been defeated. It has devoted itself not to service the public, but to service the masters over the last three decades. Yet very few officials have been penalized for such an atrocious violation of service rule. (Only a handful of corrupt officials and one Public Service Commission member have been given jail terms in 2008.) There has been no attempt to screen or identify the public servants who had been cadres of political parties before employment (Hossain 2009). Transferring non-core functions to the private sector The case for transferring non-core functions to the private sector as a means of enhancing the capability of the state in playing its role in economic development has been emphatically re-stated by Sachs in his review of economic reforms in India: [I]f the government leaves the productive sphere to the private sector (including foreign enterprises) it will be able to devote more resources and attention to real social needs, such as increased literacy and access to primary health care. With the increasing availability of international capital for industry and many kinds of infrastructure (e.g. roads, telecoms, ports), the Government can redirect its own very scarce resources to those resources which are distinctly within (it’s) purview – especially primary education and health. This kind of policy shift is underway throughout the developing world. (1994: 3) The observations offered by Sachs are highly pertinent to all South Asian economies. A significant structural weakness of these economies lies in their reliance on state-owned enterprises (SOEs). The share of the SOE sector for the 1986–91 was 13.8 per cent in India, 11.4 per cent in Pakistan, 10.7 per cent in Sri Lanka and 3.0 per cent in Bangladesh (Kirkpatrick 1997: 162). They do not seem to be particularly high by developing country standards. Some of the miracle economies of East Asia (e.g. Malaysia and Korea) have a larger SOE sector. What is conspicuous is that SOEs in South Asia seem to be characterized by inefficiencies. Often SOEs end up as employers of last resort. Consider a graphic case of SOE inefficiency in South Asia. Analysis of 1992 data shows that in Bangladesh, the state sugar monopoly had 8,000 extra employees (World Bank 1995: 12). In India, approximately 50 per cent of SOEs could be characterized as loss-making units (Arun and Nixson 1997: 212). In aggregate, such inefficiency will, in the absence of offsetting factors, retard growth (see, however, Ramaswamy and Renforth 1994 for a less pessimistic view). Subsidies that are channelled to prop up inefficient SOEs inevitably have high opportunity costs. Fewer resources are available to fund much-needed public investment in basic health and education. One estimate suggests that diverting operating subsidies for SOEs to basic education could increase educational expenditure by

South Asia in the twenty-first century

217

550 per cent in India (World Bank 1995: 15), thus providing empirical substance to the point made by Sachs (1994). Subsidies to SOEs also have predictable implications for macroeconomic stability. They contribute to fiscal deficits, loss of monetary control and current account deficits in cases where SOE losses are financed by external borrowing. From a political economy perspective, SOEs create a vested constituency opposed to economic reform. An SOE-reliant economy therefore has a vocal body of ‘losers’ who need to be carefully tackled. Given the above discussion, it is perhaps not surprising that privatization and deregulation have become central planks of the economic reform agenda in South Asia. Commentators seem to agree, however, that progress in privatization and the development of an appropriate regulatory framework in the post-privatization phase has been modest and uneven in South Asia (see World Bank 1995 and Kirkpatrick 1997). Several problems appear to have afflicted the privatization process in South Asia. The central issue seems to be lack of a credible commitment by the government. This has understandably not yielded a sufficient flow of FDI in privatized sectors because of the perception by foreign firms that they will still be subject to excessive government intervention (see Arun and Nixson 1997 for further details). Concerns have also been expressed on the weak monitoring and regulation at the main stages in the privatization process (Cameron 1997). Does the brief survey on privatization in South Asia imply that the notion of enhancing state capability by reallocating non-core functions to the private sector is doomed to failure? It is easy to despair, but one can offer a more optimistic response. It is not impossible to circumvent opposition to SOE reform in particular and economic reform in general – as the subsequent discussion amplifies. It is important to re-state the role that privatization plays in a general framework of governance. The aim of privatization is not to replace a public monopoly with a private monopoly. SOE reform on its own is also not a panacea for economic and social problems. It should not be seen as an expedient, short-term fix for unsustainable fiscal deficits. The role of privatization is quite modest. It is primarily a means of re-allocating the state’s resources to areas in which it can have the biggest impact (e.g. basic health and education). It is the moral equivalent of saying that components of military expenditure should be re-allocated to social welfare expenditure. Once the message is couched and conveyed consistently in this manner, the public perception of the legitimacy of privatization is likely to be enhanced. The political benefits of trade liberalization and non-discriminatory regionalism While macroeconomic stability is one of the necessary conditions for long-run growth in South Asia, it needs to be combined with other policy initiatives. The South Asian economies need to embrace the cause of trade liberalization with greater vigour and conviction for political economy reasons. As is well known, inward-oriented industrialization induces predatory and corrupt behaviour by the

218

South Asia in the twenty-first century

state and rent-seeking behaviour by societal groups. In a world of imperfect politics, free trade is a very useful rule of thumb because it restrains governments from engaging in sector-specific interventions that lie at the root of ‘government failure’ (Krugman 1987; Lal and Rajapatirana 1987). The acceptance of the logic that there are political benefits to free trade means that there may well be a case for implementing institutional safeguards for protecting the principle of free trade. Thus, one could argue the case for applying the super majority rule on proposals entailing restraints on free trade. In addition, one could create watchdog bodies that make it binding in protectionist proposals to proffer publicly-available documentation on the costs and benefits of protection. Such attempts at making the process of trade policy transparent may create the incentive for special interest groups to reduce their propensity to engage in lobbying activities that seek restraints on free trade. Bureaucrats in turn may be less willing to defend an ‘infant industry case’. The issue of regional co-operation is also highly germane to the evolution of the South Asian economies in the twenty-first century. Haq (1997) maintains that East Asian growth is characterized by rising intra-regional trade and investment, but regional linkages appear to be weak in South Asia. For example, the intra-regional share of exports in South Asia was only 5.1 per cent in 1980 and declined to 4.7 per cent in 1994; the intra-regional share of imports is even more modest at 2.2 per cent in 1980 and rising to 3.6 per cent in 1994. In recent years, for example, India has shredded 264 sensitive items from the list of 744 attracted tariffs for the least developed nations of SAPTA (Bangladesh, Nepal, Bhutan and Maldives) without insisting on reciprocity (Bhattacharya 2008). The corresponding figures for East Asia are: 21.1 per cent (in terms of exports) rising to 40.5 per cent in 1994 and 17.8 per cent in 1980 (in terms of imports) rising to 34.2 per cent in 1994. Studies show that several factors drive regional linkages: geographical proximity, regional living standards (as regional trading partners grow in affluence trade, investment and migration flows grow in tandem) and public policy entailing a reduction in trade and related barriers. The impact of geographical proximity is particularly striking. Studies show that a common land border between countries tends to increase trade by a factor of 2.5 (Frankel and Wei 1994). Given such results, it is ironic that, as Thomson notes, [i]n South Asia . . . overland trade between some countries is discouraged and even banned. One only has to reflect on the howls of protest that greeted recent proposals to facilitate overland trade between India and its neighbours using Bangladesh as a transit route. (1993: 18–19) There has been a belated recognition in South Asia that a lot more needs to be done in order to strengthen regional linkages (see, for example, Varghese 1990 and Waqif 1991). In 1985, the SAARC was launched. In 1993, a SAPTA was mooted and ratified in 1995 by the seven member countries. Apart from the standard agenda of mutual trade concessions, SAPTA aims to facilitate co-operation in

South Asia in the twenty-first century

219

agriculture and small-scale industry, development of human and financial resources and poverty alleviation (see ADB 1997). It is generally recognized that international trade agreements and other treaties can be a useful adjunct to domestic rules and restraints that empower (or at least have the potential to empower) governments to lock in desirable policy directions. For example, as signatories to the World Trade Organization (WTO), member countries will find it increasingly difficult to impose arbitrary restraints in trade without triggering a WTO intervention. Can SAARC-style regional co-operation play a complementary role? A lot depends on how regional co-operation is conceptualized and operated in practice. Garnaut and Drysdale (1993), among others, draw attention to the notion of ‘open regionalism’ to distinguish it from traditional regional trade agreements (e.g. Free Trade Areas) that are typically exclusive and discriminatory to the rest of the world. It is well known that such agreements cause both trade creation (which is a benefit to the regional community) and trade diversion (which is a cost to the regional community). The latter can easily exceed the former. This really is a rather poor second-best option to multilateral free trade. Open regionalism aims to be non-discriminatory. It should really be seen as a route to multilateral free trade. One could argue that it may be easier to achieve unilateral liberalization in a regional context because of the cohesiveness of small groups. Once this is accomplished, it sets a welcome precedent to the rest of the world. In this way, one can progressively approach the ultimate objective of unilateral liberalization on a global scale. In other words, ‘borderless’ regional groups may ultimately lead to a ‘borderless’ world. Garnaut and Drysdale (1993) argue that the principle of open regionalism is enshrined in APEC, which was set up in 1989 under Australian initiative. This in turn may be seen as a logical institutional complement to the market-driven process of regional integration in East Asia. From the perspective of the above discussion, SAARC has the potential to play a complementary role to the domestic momentum for trade liberalization. However, in order to achieve this desirable objective, it needs to espouse the cause of open regionalism and set it as the benchmark for member countries. It would then strengthen the position of reformist governments in South Asia in the sense that they can take the moral high ground and appeal to their constituencies that they cannot engage in policy reversals in trade and related areas because they are bound by the SAARC’s charter of open regionalism. Achieving MDGs and population control for growth It has been demonstrated that the countries studied have been enjoying high to moderate growth over the last decade and there were significant achievements in alleviating poverty along the MDGs line (except that in recent years there was a reverse turn witnessed in poverty due to the unprecedented natural disasters that hit Bangladesh and India in the last two years). The global financial meltdown and recessions since 2007, together with fuel price and food price increases in 2008, had also taken their toll on poverty alleviation in the region. This culminated with

220

South Asia in the twenty-first century

natural disasters and the global economic turmoil in South Asia, once again, reversing the situation. For example, Bangladesh’s poverty in US$1-a-day per capita terms nosedived from 35 per cent of the total population to 40 per cent in 2008. In India, it is feared that the poverty moved from 30 per cent to 36 per cent in US$1-a-day terms during the same period. A similar reverse trend can be witnessed in Pakistan and Sri Lanka. These two nations, moreover, have added burdens of terrorism and civil war, contributing towards the economic downturn and reversing whatever achievements made were in the areas of MDGs. However, a new study at Yale University is putting even greater threat in poverty alleviation and achieving MDGs to population growth in the twenty-first century (Chamie 2009). This study finds that, ‘stabilization of world population is perhaps the paramount issue of the 21st century. Without global population stabilization, humankind will find it enormously more difficult to deal with the critical issues facing the planet.’ Between the years 0 and 1500, it is estimated that the world population grew from 300 million to 500 million. In contrast, the twentieth century ushered in the world’s most rapid rates of population growth because, while mortality rates fell, fertility rates generally remained comparatively high. World population quadrupled during the past century, with 80 per cent of the growth occurring during its second half with 2 billion people in 1960, 3 billion in 1972 and 6.8 billion in 2008 (Chamie 2009). The world population increases by more than 79 million per year. Of this, India alone contributes more than 16 million and China about 9 million. The rest of South Asia contributes more than 5 million each year. More than a quarter of population growth in the world each year is contributed by South Asia’s four nations. This is by all means an alarming situation. With such a huge rate of growth in population, it will not be possible to attain the MDGs – particularly reducing poverty by half in 2015 in this part of the world. All efforts must be put in place by South Asian governments to arrest such a population explosion in early part of this century. It is not only the growth which is alarming. The population density will soon be a major crisis for both Bangladesh and Sri Lanka. Presently, in Bangladesh, almost 1,100 people live in every square kilometre of land, whereas in Sri Lanka it is 310 people, the second highest level in South Asia. The policymakers of this region must take this issue more seriously before it takes an uncontrollable turn.

Good governance in the era of information revolution: final thoughts Prescribing good policies – and exhorting governments to adopt them – is only the beginning, not the end, of economic analysis. It is this grim realization of the inherent limits of ‘neutral’ policy advice that underpin an emerging agenda of action that focuses on improving the quality of governance as the key to economic development. Advocacy of good governance still faces an uphill task. When one reflects on an underperforming South Asia struggling to cope with its pervasive poverty, one can

South Asia in the twenty-first century

221

succumb to a sense of despair. Thus, Kohli (1994) offers his grim prognosis of the ‘crisis of governability’ in India. Dutt and Kim (1994) and Chibber (1995) offer a similar account of pessimism. In the post-9/11 period, India became the target for several terrorist attacks and more recently an attack on the Mumbai in late 2008. This makes this nation’s democratic rule of last 60 years certainly vulnerable. Mascarenhas (1986) paints a tragic picture of a ‘legacy of blood’ in the case of Bangladesh. Political assassinations in the past have engendered a cycle of retribution and violence which represents a continuing threat to the nation’s fledging democracy. The nation was ruled by a non-political caretaker government backed by the military in the 2007–08 period. A democratic government has been back in power with three-fourths majority in Parliament since January 2009. In the case of Sri Lanka, Athukorela and Jayasuriya (1994: 24) make the following poignant observations: ‘As Sri Lanka entered its fifth decade of independence, the “best bet of Asia” in 1948 was being tragically transformed. By 1990 Sri Lanka was a simmering volcano of political, social, and ethnic conflicts . . .’. It appears that almost 25 years of separatist campaigns by the Tamil minority in Sri Lanka are coming to an end. The Sri Lankan army’s final push towards headquarters of the Tamil Tigers in early 2009 has been a success and the Tamil Tigers are now on the verge of a complete defeat. Pakistan does not fare any better. Cameron (1997: 240) is dismayed by a ‘political culture’ that enables ‘open and militant defiance of the writ of the government’. Once again, post-9/11 Pakistan took the full brunt of the Taliban assault towards the civilian and military force of this nation. In late 2008, the one of the top politicians, Ms Bhutto, was assassinated during an election campaign near the capital. Although Pakistan has once again had democratic rule since 2008, the nation has been thrown into a huge political chaos due to the threat from the Taliban insurgents in the remote parts of the north-western province. Compounding internal political difficulties are tensions and conflicts between countries. The Kashmir issue continues to be a major irritant in Indo-Pakistani relations. Since 9/11, Taliban insurgents have added to the Kashmir conflict. Problems still need to be resolved between Bangladesh and India on the use of eastern river waters, and between India and Sri Lanka over the latter’s ‘Tamil issue’. This has understandably restrained regional economic co-operation. The only hope one can have at the present time in this respect is that all the nations now have democratic governance in place. This certainly will bring changes for the better in the region. Given such a political context, is there any chance of re-writing the tragic tale of two Asias – a successful East and an underperforming South – in the twenty-first century? One can tell a story of hope and promise. While it is easy to become cynical about the traditional institutions of democracy in South Asia – periodic elections, parliaments, multi-party system, a free press – the new view on governance sees the need for an agenda of action that devises innovative rules of the game to invigorate the policy-making capability of democracies. Rules and restraints to enhance the credibility and commitment of the state to ‘good’ policies, the need for a bureaucracy that operates within an accountable framework, procedures for locking in the economic and political benefits of free trade and open regionalism,

222

South Asia in the twenty-first century

mechanisms for developing stakeholders in economic and broader social reforms are particular and prominent examples of good governance from which South Asia – and the rest of the world – can learn. There is much that still needs to be understood about the complex process of economic development, but at least one is beginning to ask the right questions. This is the inspiration that will engage policymakers in South Asia and elsewhere and enable them to continue the quest to conquer poverty.

Appendix 1.1

Table A1.1 Books and book-length monographs on South Asia: a random sample covering the 1960–2009 period Author(s)

Year of publication

Regional coverage

Thematic focus

Haq Singh

1963 1964

Pakistan India

Bell Onslow Snodgrass Papanek Raj

1965 1965 1966 1967 1967

Bhagwati and Desai

1970

India Asia Sri Lanka Pakistan India, Pakistan and China India

General development issues Export performance in a broad setting General development issues General development issues General development issues General development issues General development issues

Robinson and Kidron Chen and Uppal Khan Bhagwati and Srinivasan Nayyar

1970 1971 1972 1975 1976

South Asia India and China Bangladesh India India

Faaland and Parkinson de Silva Pyatt and Roe

1976 1977 1977

Bangladesh Sri Lanka Sri Lanka

Uppal Cassen

1977 1978

South Asia India

Francine

1978

India

Islam Faaland

1978 1981

Bangladesh Bangladesh

Adams and Iqbal

1982

Pakistan

Wolf

1982

India

Sobhan

1982

Bangladesh

General development issues with an emphasis on industrialization General development issues General development issues General development issues Trade liberalization Export performance in a broad setting General development issues General development issues Social Accounting and Development Planning General development issues General development and social issues Political economy with a focus on 1947–78 period General development issues Impact of foreign aid in a general setting Political economy with a focus on trade policy Trade policy, esp. export performance Political economy with an emphasis on foreign aid

224

South Asian economic development

Author(s)

Year of publication

Regional coverage

Thematic focus

Naqvi and Kemal

1983

Pakistan

Adams and Iqbal Bardhan Papanek

1983 1984 1985

Pakistan India South Asia

La Porte and Burki Little et al.

1985 1987

Hussain Lucas and Papanek

1988 1988

Pakistan India and other developing economies Pakistan India

Structure of protection with a focus on 1980–81 Economic development Political economy General development issues and political economy General development issues Small-scale enterprises in a broad context

Srinivasan and Bardhan 1988 Noman 1988

South Asia Pakistan

James et al. Khan and Hossain Lipton and Toye

1989 1989 1990

South and East Asia Bangladesh India

Raghavan Satchi

1990 1990

SAARC nations Sri Lanka

Singh Bhattia

1990 1990

South Asia Pakistan

Ahluwalia, M Papageorgiu et al.

1991 1991

Bhalla Bimal James and Roy Rosen

1992 1992 1992 1992

India Pakistan, Indonesia, Sri Lanka India and China India Pakistan India and China

Roy and Williams

1992

India

Bhagwati Athukorela and Jaysurya Joshi and Little

1993 1994

India Sri Lanka

1994

India

World Bank

1994

Bangladesh

Grieve and Haq

1995

Bangladesh

Dreze and Sen

1995

India

Hossain and Rashid

1996

South Asia

General development issues General development issues with a focus on the 1980s Rural poverty Political and economic development General development issues General development issues Impact of foreign aid in a general development context Macroeconomic issues Political economy from the perspective of dependency theory Rural poverty General development issues within a political economy framework Sectoral/ manufacturing Trade liberalization General development issues General development issues General development issues Economic reform issues in the 1980s Political economy of development Recent economic reforms Macroeconomic policy in a general development context. Macroeconomic management in a broad context Economic reform issues in the 1980s and 1990s General development issues with an emphasis on recent developments Poverty and human development with a focus on public action General development issues with an emphasis on recent developments and political economy considerations

Books and book-length monographs on South Asia

225

Author(s)

Year of publication

Regional coverage

Thematic focus

Lim Sobhan et al. Bhagwati and Panagariya Joshi and Little

1995 1996 1996

South and East Asia Bangladesh Global

1997

India

ADB

1997

Asia and Pacific

General development issues Recent economic reforms The economics of preferential trade agreements Macroeconomic policy in a general development context Economic transformation over 1965–95 and challenges to economic development to the year 2025 Human development in a broad context

Rim Haq

1997

World Bank

1997

South Asia, with some reference to East Asia South Asia

Hossain et al. Krueger

1999 2002

South Asia India

Torero et al.

2002

Global

Hossain et al.

2003

Bangladesh

Hossain et al. Sachs et al. Desai

2004 1999 2006

Asia-Pacific India India

Ahmed Singh

2006 2007

South Asia India

Sthanumoorty Herath and Sharma Singh Abraham Haq M Human Dev Centre Mittal et al. Das K Khan et al. Chaturvedi et al.

2007 2007 2007 2007 2008

India South Asia India India South Asia

2008 2008 2008 2008

India South Asia Bangladesh South Asia

Hossain

2009

Bangladesh

South Asia’s integration into the world economy Economic development issues Economic policy reform and the Indian economy ICT for development and poverty reduction Development agenda and vision 2020 Telecommunications reform Economic reforms India’s telecommunications industry South Asia’s development Regulation, institutions and law Economic reforms Child labour in South Asia Politics of change Mobile phones Human Development Indian agriculture growth Regionalism in South Asia Politics Human development in South Asia Democracy and development

Notes Randomly selected through standard bibliographic search procedures. No attempt is made to identify icons in the literature, although it should be noted that quite a few of the authors are luminaries in the field of development economics.

Appendix 14.1 Data definitions and sources

State Domestic Product (SDP): SDP represents the value of goods and services produced within the geographical boundaries of the state in a particular year. The Directorate of Economics and Statistics prepares the estimates of gross/net state domestic product and per capita state domestic product at current and constant prices any years as per guidelines of Central Statistical Commission (CSO) covering all sectors of the economy. Besides estimates of current year, previous year estimates are also revised on the basis of the latest availability of data. For our analysis, we use the new series of gross state domestic product at current prices released on 28 February 2008 adopting 1999–2000 as the base year. Capital: Project investment excluding telecom investment is taken as a proxy for capital. These are given in Rs. crore (10 million) and available in state analysis service, CMIE. Project investment: These are total outstanding investments projects which are under implementation, announced and proposed and have investment more than one crore. Projects under implementation are those on which civil work has started or have received necessary clearances, finalized or raised funds, etc. Announced and proposed projects are, primarily, intentions of the promoter(s). Telecom investment: These are outstanding investments in telecommunication services projects which are under implementation, announced and proposed. Projects under implementation are those on which civil work has started or have received necessary clearances, finalized or raised funds, etc. Announced and proposed projects are, primarily, intentions of the promoter(s). Human capital: This involves data relating to number of students enrolled in postsecondary education. This includes all graduated, Masters and PhD students, including those enrolled in polytechnics. The data has been gathered from various issues of Selected Education Statistics published by Ministry of Human Resource Development, GOI. Mobile phone penetration (per 100 persons): This data includes both GSM and CDMA subscribers. This is collected from various published sources and TRAI.

Data definitions and sources

227

Price of mobile: This is proxied by average revenue per user of mobile. This is collected from TRAI and COAI. Price of fixed line: This is proxied by average revenue per user of fixed line. This is collected from TRAI and COAI. Geographical area (per sq. km.): This is collected from Census of India, 2001.

Appendix 14.2 Descriptive statistics

Data for telecom services are available as per licensed area that is, for 23 service areas (19 circles and four metros). Redefining a few service areas is necessary to match with data for socio-economic variables which are only available at the state level. This exercise reduces availability to 19 cross-section units. For the matching see Appendix 14.5. Table A14.2.1 Descriptive statistics Variable

No. of observation

Mean

Standard deviation

Minimum

Maximum

SDP (in billion) Per capita SDP Mobile penetration (in %) Human capital Price of mobile Price of fixed line Geographical area Investment (in billion)

171 171

1,260,000 26,000

892,000 11,870.47

141,000 7,972

4,730,000 69,517

171 171 166 170

7.48 609,456 562.79 521.94

12.92 53,414.32 322.56 140.31

0 47,359 198 192

96.95 3,949,106 1,483 888

171

172,753

116,652

1,483

443,436

171

4,140,000

4,080,000

4,260,000

20,400,000

Appendix 14.3 The econometric model and detailed results

The output Equation 14.1 models the level of output (GSDP) as a function of the total investment net of telecom investment, a measure of human capital and the mobile penetration rate. We use a dummy variable for each state, the socalled ‘fixed effects approach’ which controls for unobservable characteristics that are specific to each state. The aggregate production function equation is then as follows: SGDPit = ␣0 + ␣1 Kit + ␣2 Lit + ␣3 MPENit + ␣4 Di + ␧

(A14.1)

Where SGDP is state gross domestic product, K is investment, L is human capital, MPEN is mobile penetration per 100 persons and D captures the state-specific effect. Subscript i=1,2,3, . . . 19 represents the 19 states and subscript t corresponds to the nine periods for which data is available. Equation 14.2 models the level of mobile penetration (MPEN) as a function of the level of GSDP per capita (SGDP_PC), mobile price which is proxied by average revenue per user (PriceM) and the fixed-line price which is revenue per fixedline subscriber (PriceF). MPENit = ␤0 + ␤1 SGDP_PCit + ␤2 Price Mit + ␤2 Price Fit + ␧⬘

(A14.2)

The supply Equation 14.3 assumes that the growth rate of mobile penetration depends on the price of mobiles and the geographic area (GA). We estimate the system of equations described above using the three-stage least squares procedure using exogenous variables in the system of equations such as population, state domestic product in manufacturing and services as instruments for the endogenous variables (output, the level of mobile and fixed penetration and the mobile and fixed prices). (MPENit – MPENit)/MPENit = ␪0 + ␪1 GA + ␪2 Price Mit + ␧⬙

(A14.3)

It is important to note that Equations A14.2 and A14.3 endogenize telecommunications investment since these equations involve the demand for and supply of telecommunication.

230

South Asian economic development

We estimate three specifications of the model (1)–(3). One specification includes all the states, while the other two classify states as high or low penetration states according to mobile density. High density states are assumed to be those that have achieved above median penetration of 25 per cent in 2008. The first specification of model (1)–(3) uses observations from all states to arrive at the estimates. The parameter estimates of the output equation indicate that capital is positive and significantly associated with economic growth. Human capital also picks up a positive coefficient, but is significant only at the 10 per cent level of significance. The coefficient on mobile penetration is both positive and significant and is estimated at 0.12. This implies that 10 per cent increase in mobile penetration delivers, on average, 1.2 per cent increase in output, thus attributing a fairly high impact to mobile. The magnitude of this impact is similar to the one found by Bedi et al. in their cross country regression of 95 countries (Torero, Choudhary and Bedi 2002). For the demand equation, the estimates show that mobile demand is inversely related to price and positively correlated with increases in income. Both these estimates are highly significant. The equation is in double-log form so the coefficients can be interpreted as elasticities of demand. The own-price elasticity of mobile phones is minus 2.12, which implies that demand is elastic: a 10 per cent price increase would reduce demand by roughly 21 per cent. However, fixed-line prices do not seem to have any impact on mobile demand, given that the coefficient is not only of the wrong sign, but it is also not significant. One possible explanation for this is the much greater availability and utility of mobile phones across the states, thus rendering demand for mobile phones to be independent of fixed-line prices. The positive and highly significant income effect (income elasticity is 2.45) confirms that the causal relationship between telecommunications and economic growth runs both ways. In addition, the estimate suggests that mobiles are ‘luxuries’ (in the technical sense) since the income elasticity is significantly above one. This conclusion, however, needs to be tempered with the fact that some of those interviewed during the course of the survey reported higher expenditure on telecom than on other items, such as education and electricity, because they perceived it as a basic need and were willing to incur higher costs. At one level, this conflict reveals the difficulty of reconciling micro-level survey evidence with macro-level evidence. At another level, it suggests that there may be certain other exogenous factors driving demand for mobile telephony, especially among the ‘poor’. For the supply function, we find that the GA and price of mobiles are both highly significant in explaining telecommunications investments. Larger states do invest more, while higher prices also induce greater investment. More than any other infrastructure, telecom networks are subject to what are called ‘network effects’. An implication of network effects or externalities is that the impact of telecommunications on growth might not be linear, as the growth impact might be larger whenever a significant network size is achieved. This would imply that larger growth effects might be seen in those states that have achieved a critical mass in mobile infrastructure. While we do not have a large enough data set to classify states into numerous categories, we do split our sample into high- and

The econometric model and detailed results

231

Table A14.3.1 Results of econometric models All states Cross-section observation

19

High penetration states 8

Low penetration states 11

Output equation Intercept Investment Human capital Mobile penetration R-Square

26.30* 25.58* (22.80) (52.95) 0.054* 0.07* (3.57) (4.65) 0.024*** 0.071* (1.82) (4.31) 0.120* 0.131* (22.80) (23.50) 0.99 0.99

0.10* (51.40) 0.065* (4.02) –0.01 (–0.75) 0.10* (18.83) 0.99

Demand equation Intercept Per capita SDP Price of mobile Price of fixed line R-Square

–8.64* (–3.57) 2.45* (15.10) –2.12* (–10.34) –0.384 (–1.19) 0.81

–21.48* (–4.75) 2.83* (8.66) –1.87* (–7.85) 0.789** (2.28) 0.65

1.19 (0.29) 2.34* (7.73) –1.92* (–6.43) –2.00** (–4.28) 0.82

–2.75** (–3.13) 0.067*** (1.81) 0.289* (2.29) 0.47

–3.40* (–2.50) –0.005*** (–0.06) 0.594** (5.32) 0.25

Supply equation Intercept Geographical area Price of mobile R-Square

–4.25* (–6.44) 0.128* (4.05) 0.448* (5.07) 0.21

Notes * Significant at 1 per cent level of Significance; ** Significant at 5 per cent level of Significance; *** Significant at 10 per cent level of Significance; All Z values in parentheses; All variables are in their natural logarithm.

low-penetration states based on the median penetration level of 25 per cent achieved in 2008. In order to test whether such non-linearities in telecommunications do exist, we estimate the model (1)–(3) for high- and low-penetration states, again allowing for fixed state effects. If the coefficient of mobile penetration of high-penetration states is estimated to be greater than for low-penetration states then we have support for the critical mass hypothesis. The estimation results of the system are consistent with the idea that telecommunications infrastructure creates network externalities. The coefficient is higher for high-penetration states

232

South Asian economic development

compared to low-penetration states (0.13 versus 0.1), suggesting the need to increase teledensity in those states that are lagging behind. The rest of the coefficient estimates are similar to the first model, that is, own-price elasticity is negative and significant and income elasticity is high and significant, implying that mobiles are luxuries in the technical sense. The only difference is in the estimate of crosselasticity. In high-penetration states, the impact of fixed-line price on mobile demand conforms to the idea that fixed and mobile phones are substitutes, that is, the cross-price elasticity is positive and significant, although the magnitude is small.

Appendix 14.4 State boundaries and mobile licences

The first licences to be given for mobile were the four metros: Chennai, Delhi, Kolkata, and Mumbai. They were India’s four biggest cities in 1995. Except Delhi, the others were carved out from states, primarily for their revenue potential as a pilot exercise for the later state-specific licences which were awarded in 1996. For estimation, we aggregate UP(E) and UP(W) and also combine North East I and II.

Table A14.4.1 State boundaries and mobile licences State

Licence for mobile

Licence for fixed line

Classification

1 2 3 4 5 6 7 8 9

Andhra Pradesh Assam Bihar including Jharkhand Delhi Gujarat Haryana Himachal Pradesh J&K

Andhra Pradesh Assam Bihar including Jharkhand Delhi Gujarat Haryana Himachal Pradesh J&K

A C C

Karnataka Kerala Madhya Pradesh including Chattisgarh Maharashtra including Goa but excluding Mumbai North East I

Karnataka Kerala Madhya Pradesh including Chattisgarh Maharashtra including Mumbai and Goa North East I

C

North East II

North East II

C

Orissa Punjab

Orissa Punjab

C B

10 11 12 13

Andhra Pradesh Assam Bihar Jharkhand Delhi Gujarat Haryana Himachal Pradesh Jammu and Kashmir (J&K) Karnataka Kerala Madhya Pradesh Chattisgarh

14 Maharashtra 15 Goa 16 17 18 19 20 21 22 23

Tripura Meghalaya Mizoram Arunachal Pradesh Manipur Nagaland Orissa Punjab

M A B C C A B B A

234

South Asian economic development

State

Licence for mobile

Licence for fixed line

Classification

24 Rajasthan 28 Tamil Nadu

Rajasthan Tamil Nadu excluding Chennai UP (E) UP (W) WB and A&N including Sikkim but excluding Kolkata

Rajasthan Tamil Nadu including Chennai UP (E) UP (W) WB and A&N including Sikkim but excluding Kolkata

B A

30 31 32 33 29 30 31 32

Uttar Pradesh Uttaranchal West Bengal (WB) Andaman and Nicobar Islands (A&N Sikkim Chennai Kolkata Mumbai

B B B

M M M

Note North East I* refers to Meghalaya, Mizoram and Tripura; North East II refers to Arunachal Pradesh, Manipur and Nagaland

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

B C C C C C C C M M M M

Source: Author tabulation based on TRAI data

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

A A A A A B B B B B B B

Andhra Pradesh Gujarat Karnataka Maharashtra Tamil Nadu Haryana Kerala Madhya Pradesh Punjab Rajasthan UP E) UP W) West Bengal & Andaman & Nicobar Assam Bihar Himachal Pradesh Jammu & Kashmir North East I* North East II* Orissa Chennai Delhi Kolkata Mumbai

Reliance

BSNL/ MTNL

Metro/ circle

State

Table A14.5.1 Operators by state

Operations by state

Appendix 14.5

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Bharti

✓ ✓ ✓ ✓ ✓

✓ ✓

✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Tata

✓ ✓ ✓ ✓

✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Vodafone

✓

✓

✓ ✓ ✓

✓ ✓

✓

✓ ✓

Idea

✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓

✓

Aircel

✓

✓

Spice

✓

BPL

Bibliography

Abraham, J., Dean, R.D. and Subramanian, A. (2007) ‘Ringing in the next billion mobile consumers – A road map for accelerating telecom growth in India’, Boston: The Boston Consulting Group. Abraham, R. (2007) ‘Mobile phones and economic development: evidence from the fishing industry in India’, MIT Press, 4, 1: 5–17. Adams, F. G. and Davis, I. (1994) ‘The role of policy in economic development: East Asia and Latin America’, Asian-Pacific Economic Literature, 8, 1: 8–24. Adams, J. and Iqbal, S. (1983) Exports, Politics and Economic Development: Pakistan 1970–1982, Boulder, CO: Westview Press. ADB (1971) Southeast Asia’s Economy in the 1970s, London: Longman. ADB (1990a) Asian Development Outlook 1990, Manila: Asian Development Bank. ADB (1990b) Human Resource Policy and Economic Development – Selected Country Studies, Manila: Economics and Development Center, Asian Development Bank. ADB (1991) Asian Development Outlook 1991, Manila: Asian Development Bank. ADB (1992) Key Indicators of Developing Asian and Pacific Countries, 1992, Oxford: Oxford University Press. ADB (1994) Asian Development Outlook 1994, Oxford: Oxford University Press. ADB (1995) Asian Development Bank Annual Report 1995, Manila: Asian Development Bank. ADB (1995a) Key Indicators of Developing Asian and Pacific Countries, 1995, Vol. xxvi, Oxford: Oxford University Press. ADB (1996) Asian Development Outlook 1995–96, Manila: Asian Development Bank, p. 224. ADB (1997a) Asian Development Outlook 1996 and 1997, Oxford: Oxford University Press. ADB (1997b) Emerging Asia: changes and challenges, Manila: Asian Development Bank. ADB (1998) Asian Development Outlook 1997 and 1998, Oxford: Oxford University Press. ADB (2004) Asian Development Outlook 2004, Oxford: Oxford University Press. Addison, T. and Demery, L. (eds) (1987) Wages and Labour Conditions in the Newly Industrialising Countries of Asia, London: Overseas Development Institute. Agarwala, R. (1983) ‘Price distortion and growth in developing countries’, World Bank Staff Working Paper No. 575 , Washington, D.C.: World Bank. Ahluwalia, I. J. (1991) Productivity Growth in Indian Manufacturing, New Delhi: Oxford University Press. —— (1994) ‘New economic policies: reform of public sector enterprises and privatisation in India’, paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asia Research Centre, Australian National University, Canberra.

Bibliography

237

Ahluwalia, M. (1976) ‘Inequality, poverty and development’, Journal of Development Economics, 3, 4: 307–42. Ahluwalia, M. et al. (1974) Redistribution with Growth, New York: Oxford University Press. Ahluwalia, M., Carter, N. G. and Chenery, H. B. (1979) ‘Growth and poverty in developing countries, Journal of Developing Economies, 6, 3: 299–34. Ahluwalia, M. S. (1990) ‘Policies for poverty alleviation’, Asian Development Review, 8, 1: 111–32. —— (2002) ‘State level performance under economic reforms in India’, Anne O. Krueger (ed.), Economic Policy Reforms and the Indian Economy, Chicago: University of Chicago Press. Ahmad, E. and Wang, Y. (1991) ‘Inequality and poverty in China’, World Bank Economic Review, 5, 2: 231–58. Ahmad, Q. K. (1992) ‘Policies and strategies for sustainable development in Bangladesh’, Futures 24, 9: 879–93. —— (1994) ‘Anatomy of economic liberalisation efforts and results in Bangladesh’, paper presented to the conference on Economic Liberalization in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. —— (1994a) ‘Study on economic reform in Bangladesh, Dhaka: Bangladesh Unnayan Parishad’, paper prepared for the Canadian International Development Agency. Ahmed, K. (1993) ‘Renewable Energy Technologies: a review of the status and costs of selected technologies’, Technical Paper No. 240, Washington, DC: Energy Series, World Bank. Ahmed, S. (2006) Explaining South Asia’s Development Success: The Role of Good Policies, World Bank Publications, Washington, D.C. Ahmed, S. and Patel, P. (2007) Managing climate change, The Daily Star, 28 November, Dhaka, . AIIA (2001) Breaking the Skills Barrier, April, Canberra: Australian Information Industry Association (AIIA). —— (2003) Snapshot of the ICT Industry in Australia, Canberra: Australian Information Industry Association (AIIA). Alesina, A. and Rodrik, D. (1994) ‘Distributive politics and economic growth’, Quarterly Journal of Economics, May: 464–90. Amsden, A. (1989) Asia’s Next Giant: South Korea and late industrialization, New York: Oxford University Press. Amsden, A. and Euh, Y. D. (1993) ‘South Korea’s 1980s financial reforms: good-bye financial repression (maybe), hell new institutional restraints’, World Development, March. Anderson, K. and Blackhurst R. (1992) The Greening of World Trade Issues, London: Harvester Wheatsheaf. —— (eds) (1993) Regional Integration and the Global Trading System, New York: Harvester Wheatsheaf. Aoki, M. (1995) ‘Controlling insider control: issues of corporate governance in transition economies’, in M. Aoki and H. K. Kim (eds), Corporate Governance in Transition Economies, EDI, Washington, DC: World Bank. ARIC (2004) Asian Regional Information Centre, . Arun, T.G. and Nixson, F.I. (1997) ‘Privatization and foreign participation: the Indian experience’, Journal of the Asia Pacific Economy, 2, 2: 201–24. Asia Yearbook, (1994) Asia 1994 Yearbook: a review of the events for 1993, Hong Kong: Far Eastern Economic Review.

238

Bibliography

Asia Yearbook: Asia 1997 Yearbook, Hong Kong: Far Eastern Economic Review. Asia Yearbook, (several issues) Hong Kong: Far Eastern Economic Review. Asiaweek (1997) ‘Bottom line’, Asiaweek, 23, 23: 64. Athukorela, P. (1993) ‘International migration in the Asian-Pacific region: patterns, policies, and economic implications’, Asian-Pacific Economic Literature, 7, 2: 28–57. Athukorela, P. and Jayasuriya, S. (1994) Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969–90, Washington, DC: World Bank. Axelrod, R. (1984) The Evolution of Cooperation, New York: Oxford University Press. Azariadies, C. and Drazen, A. (1990) ‘Threshold externalities in economic development’, Quarterly Journal of Economics, 105: 501–26. Balassa, B. (1962) The Theory of Economic Integration, London: Allen and Unwin. —— (1977) Policy Reform in Developing Countries, Oxford and New York: Pergamon Press. —— (1988) ‘The lessons of East Asian development: an overview’, Economic Development and Cultural Change, 36 (April), S273–91. Baldwin, R. and Cave, M. (1999) Understanding Regulation: theory, strategy and practice, Oxford: Oxford University Press. Bangkok Post (1997) 28 June, Bangkok. Bangladesh Bureau of Statistics (2005) Pocket Dictionary, Dhaka: Bangladesh Government Press. Bardhan, P (1993) ‘Analytics of the institutions of informal cooperation in rural Development’, World Development, 21, 4: 633–9. —— (1995) ‘The implications of new growth theory for trade and development’, in Quibria, M. G. (ed.), Critical Issues in Asian Development, Hong Kong: Oxford University Press. Barro, R. and Lee, J. W (1993) ‘International comparison of educational attainment’, Journal of Monetary Economics, 32: 363–94. —— (1996) ‘International measures of schooling years and schooling quality’, American Economic Review, 86, 2: 218–23. Bates, B., Kundzewicz, Z., Wu, S. and Palutikof J. (eds) (2008) Climate Change and Water, WMO and UNEP, Geneva: IPCC. Bauer, P. T. (1971) ‘Economic history as theory’, Economica, 38: 163–79. Baumol, W. J. and Oates, W. E. (1975) The Theory of Environmental Policy, Englewood Cliffs: Prentice-Hall. Begum, S. M and Singh, C. (2007) ‘The economics behind son preference in South India’ in World Sustainable Development Outlook 2007, Allam Ahmed (ed.), London: University of Sussex, pp. 391–400. Behrman, J. R. (1990) Human Resource Led Development? Review of Issues and Evidence, New Delhi and Geneva: ILO-ARTEP. Behrman, J. R. and Birdsall, N. (1983) ‘The quality of schooling: quantity alone is misleading’, American Economic Review, 2: 928–46. Bell, C. (1988) ‘Credit markets and interlinked transactions’, in H. B. Chenery and T. N. Srinivasan (eds) Handbook of Development Economics, Amsterdam: North-Holland. —— (1991) ‘Markets, power and productivity in rural Asia: a review article’, Journal of Development Economics, 36, 2: 373–93. Bergsten, C. F. and Noland, M. (1993) Pacific Dynamism and the International Economic System, Washington, DC: Institute for International Economics. Bhagwati, J. (1978) Anatomy of Consequences of Exchange Rate Regimes, New York: NBER. Bhagwati, J. N. (1993) India in Transition: freeing the economy, Oxford: Clarendon.

Bibliography

239

—— (1994) ‘Regionalism and multilateralism: an overview’, in R. Garnaut and P. Drysdale (eds), Asia-Pacific Regionalism – Readings in International Economic Relations, Sydney: Harper Collins. —— (1995) ‘The new thinking on development’, Journal of Democracy, 6, 4: 50–64. Bhagwati, J. N. and Desai, P. (1970) India Planning for Industrialization: industrialization and trade policies since 1951, London: Oxford University Press. Bhagwati, J. N and Panaguriya, A. (eds) (1996) The Economics of Preferential Trade Agreements, Washington DC: AEI Press. Bhagwati, J. N. and Srinivasan, T. N. (1975) Foreign Trade Regimes and Economic Development – India, New York: National Bureau of Economic Research. —— (1993) India’s Economic Reform, New Delhi: Ministry of Finance. Bhatia, B. M. (1990) Pakistan’s Economic Development: freedom to bondage, Karachi: Advent Books. Bhatia, R. (1988) ‘Photovoltaic street lighting in India’, in A. S. Bhalla and D. James (eds), New Technologies and Development, Boulder, CO: Lynne Riener Publishers. Bhattacharya, A. and Pangestu, M. (1993) ‘Indonesia: development transformation and public policy’, in Lessons of East Asia Series, Washington, DC: World Bank. Bigsten, A. (1989) ‘Poverty, inequality and development’, in N. Gemmel (ed.), Surveys in Development Economics, Oxford: Basil Blackwell. Birdsall, N. (1995) ‘Rountable discussion on employment and development: growth, inequality and the labour market’, Proceedings of the World Bank Annual Conference on Development Economics 1994, Washington, DC: World Bank. Birdsall, N., Ross, D. and Sabot, N. (1995) ‘Inequality and growth reconsidered lessons from Asia’, World Bank Economic Review, 9, 3: 477–508. Bonnerjee, A. (2009) Hunger in South Asia ‘hits 40-year high’, UNICEF, New Delhi Booth, A. (1994) ‘Review of Ogawa et al.’, Asian-Pacific Economic Literature, 8, 1. Bose, S. (ed.) (1990) South Asia and World Capitalism, Delhi: Oxford University Press. Boserup, E. and Harris, D. (1990) ‘Population, the status of women and rural development’, in G. McNicoll and M. Cain (eds), Rural Development and Population: institutions and policy, pp. 45–60, New York: Oxford University Press. Bourguinon, F., deMelo, J. and Morrison, C. (1991) ‘Poverty and income distribution during adjustment issues and evidence’, World Development, 19, 11: 1485–508. Boyden, J. and Myers, W. (1994) Exploring Alternative Approaches to Combating Child Labour, Stockholm: UNICEF. Brandon, C. and Ramankutty, R. (1993) ‘Toward an environmental strategy for Asia’, World Bank Discussion Paper No. 224, Washington, DC: World Bank. Brown, A., Hossain, M. and Nguyen, T. (eds) (2004) Telecommunications Reform in the Asia Pacific, Cheltenham: Edward Elgar. Buddecom Report (2007) Western Union Telecoms Markets and Statistic, New Delhi. Business India (2008) Sunil Mittal interview with Economic Times, 16 November: 8 and 16. Business Standard (2003) ‘A third of forex reserves due to software’, <www.nasscom. org/media room>, accessed 16 January 2009. Byrd, W. A. (1991) The Market Mechanism and Economic Reform in China, New York: M. E. Sharpe. Byron, R. P. and Manaloto, E. Q. (1990) ‘Returns to education in China’, Economic Development and Cultural Change, 38, 4: 783–96. Cameron, J. (1997) ‘Privatization and the real economic development problems of Pakistan’, Journal of the Asia Pacific Economy, 2, 2: 239–49.

240

Bibliography

Caprio, G. (1996) ‘Bank regulation: the case of the missing model’, World Bank Policy Research Working Paper No. 1574, Washington, DC: World Bank. Caprio, G. and Klingebiel, D. (1997) ‘Bank insolvency: bank luck, bad policy or bad banking?’, in M. Bruno and B. Pleskovic (eds), Annual World Bank Conference on Development Economics 1996, Washington, DC: World Bank. Carrath, A. A. and Oswald, A. J. (1987) ‘Union preferences and labour market models: insiders and outsiders’, Economic Journal, 97: 431–45. Carbough, R. J. (2009) International Economics, 12th edn, Mason: South-Western Cangage Learning. Cassen, R. H. (1978) India: population, economy, society, London: MacMillan. Cernea, Michael M. (1989) ‘User groups as producers in participatory afforestation strategies’, Discussion Paper No. 70, World Bank. Chakravarty, S. (1990) ‘Aspects of India’s development strategy for the 1980s’, in The Indian Economy and Its performance Since Independence, Delhi: Oxford University Press. Chakravarty, S. (1990) ‘Development strategies for growth with equity: the South Asian experience’, Asian Development Review 8, 1: 133–59. Chamie, J. (2009) ‘Exporting people’, in Yale University (ed.) Yale Global Online, New Haven: Yale University (www.yaleglobal.yale.edu, accessed on 5 April). Chaturvedi S. K., Sharma S. K., and Kumar, M. (2008) Human Development in South Asia in Twenty First Century, New Delhi: Radha Publication. Chaudhry, M. G. (1991) ‘Agricultural transformation in South Asia: self-sufficiency to surplus’, paper presented to the conference held in New Delhi on the Future of AsiaPacific Economies, 11–13 March, Asian and Pacific Development Centre, Kuala Lumpur. Chibber, P. (1995) ‘Political parties, electoral competition, government expenditures and economic reform in India’, The Journal of Development Studies, 32, 1: 74–96. Chopra, A., Collyns, C., Hemming, R., Parker, K., Chu, W. and Fratzcher, O. (1995) India: economic reform and growth, Occasional Paper 134, Washington, DC: International Monetary Fund. Choudhury, R.A., Gamkhar, S. and Ghose, A. (eds) (1990) The Indian Economy and Its Performance since Independence, Delhi: Oxford University Press. Chow, P. C. Y. and Kellman, M. H. (1993) Trade: the engine of growth in East Asia, New York: Oxford University Press. Chowdhury, A. and Islam, I. (1993) The Newly Industrialising Economies of East Asia, London and New York: Routledge. Chowdhury, S. and Mazumdar, P. P. (1991) The Condition of Garment Workers in Bangladesh – An Appraisal, Dhaka: Bangladesh Institute of Development Studies. Chowdhury, T. E. (1992) ‘Privatisation of State Enterprises in Bangladesh, 1975–84’, in G. Lamb and R. Weaving (eds), Managing Policy Reforms in the Real World, EDI series, Washington, DC: World Bank. Claessens, S. and Glaessner, T. (1997) Are Financial Sector Weaknesses Undermining the East Asian Miracle?, Washington, DC: World Bank. Cohen, D. (2005) ‘India special: millions get mobiles’, New Scientist, 19 February: 10. Connelly, M (2006) Population control in India: prologue to the emergency period, Population and Development Review, 32, 4: 629–67. Corbett, M. (2003) ‘Outsource India’, paper presented to the NASSCOM Conference on Outsourcing and BPO, Chennai, 21 January. Corden, W. M. (1991) ‘Exchange rate policy in developing countries’, in J. deMelo and A. Sapir (eds), Trade Theory and Economic Reform – North, South and East: essays in honour of Bela Balassa, Oxford: Basil Blackwell.

Bibliography

241

Corea, A. (1965) Asian Economic Development, London: Nicholson. Cornia, G. A., Jolly, R. and Stewart, F. (1988) Adjustment with a Human Face, Oxford: Clarendon Press. Cottani, J. and Cavallo, D. (1993) ‘Financial reform and liberalisation’, in R. Dornbusch (ed.), Policymaking in the Open Economy: concepts and case studies in economic performance, Washington, DC: World Bank, EDI Series in Economic Development. Crawford, E. and Thorbecke, E. (1980) ‘The analysis of food poverty: an illustration from Kenya’, Pakistan Development Review 19, 4: 311–35. Cronin, F. J., Colleran, E. K., Herbert, P. L, Lewitzky, S. (1993) ‘Telecommunications and growth’, Telecommunications Policy, 17: 677–96. Cronin, F. J., Parker, E. B, Colleran, E. K., Gold, M. A. (1991) ‘Telecommunications infrastructure and economic growth: an analysis of causality’, Telecommunications Policy, 15: 529–34. Cronin, F. J., Parker, E. B., Colleran, E. K., Gold, M. A. (1993) ‘Telecommunications infrastructure investment and economic development’, Telecommunications Policy, 17: 415–30. Cukierman, A., Webb, S. B. and Neyapti, B. (1992) ‘Measuring the independence of central banks’, The World Bank Economic Review, 6, 3: 353–98. Daily Star, (1997) Dhaka, Bangladesh, 2 June. —— (1997) Dhaka, Bangladesh, 28 April. Dangalle, N. (1998) ‘Controlling population growth in Sri Lanka: perceptions, policies and strategies’, Journal of Population Studies, 1, 1: 1–24. Dasgupta, A. K. (1973) Agriculture and Economic Development in India, New Delhi: Associated Publishing Company. Dasgupta, P. (1990) ‘The environment as a commodity’, Oxford Review of Economic Policy, 6: 51–67. —— (1995) ‘Economic development and the environment: issues, policies, and the political economy’, in M. G. Quibria (ed.), Critical Issues in Asian Development, Hong Kong: Oxford University Press. Dasgupta, P. and Maler, K. G. (1992) ‘The environment and emerging development issues’, Proceedings of the World Bank Annual Conference on Development Economics 1991. Dash C. K. (2008) Regionalism in South Asia: Negotiating Cooperation, Institutional Structures, Abingdon: Routledge. de Melo, J. and Panagariya, A. (1993) ‘Introduction’, in de Melo, J. and Panagariya (eds), New Dimensions in Regional Integration, Cambridge: University Press. de Walle, D.V. (1995) ‘Public spending and the poor: what we know, what we need to know’, Policy Research Working Paper 1476. Dean, J. M., Desai, S. and Riedel, J. (1994) ‘Trade policy reform in developing countries since 1985’, World Bank Discussion Paper No. 267, Washington, DC: The World Bank. Department of Telecommunications (1994) The National Telecom Policy 1994, New Delhi: Government of India. —— (1999) The New Telecom Policy 1999, New Delhi: Government of India, <www.trai. gov.in>. Desai, V. A. (2006) India’s Telecommunications Industry: history, analysis, diagnosis, New Delhi: Sage Publication. Deyo, F. (1987) ‘State and labour: modes of political exclusion in East Asian development’, in F. Deyo (ed.), The Political Economy of the New Asian Industrialism, Ithaca and London: Cornell University Press.

242

Bibliography

—— (1989) Beneath the Economic Miracle: labour subordination in the new Asian industrialism, Berkeley: University of California Press. Dillinger, W. and Fay, M. (2001) ‘From centralized to decentralized governance issues for the New Millennium’, Finance and Development, Washington, DC: IMF, December: 56–59. Dixon, C. (1993) South East Asia in the World-Economy, Cambridge: Cambridge University Press. Dixon, C. and Drakakis-Smith, D. (1993) Economic and Social Development in Pacific Asia, London and New York: Routledge. Dornbusch, R. and Park, Y. (1987) ‘Korean growth policy’, Brookings Papers on Economic Activity, 2: 389–454. Dreze, J. and Sen, A. K. (1990) Hunger and Public Action, Oxford: Clarendon Press. —— (eds) (1991) The Political Economy of Hunger: famine prevention, vol. 2, Oxford: Oxford University Press. Dunham, D. and Kelegama, S. (1994a) ‘The second wave of liberalisation in Sri Lanka 1989–93: reform and governance’, paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. —— (1994b) ‘Economic liberalization and structural reforms: the experience of Sri Lanka, 1977–93’, Working Paper Series No. 163, The Hague: Institute of Social Studies. Dunning, J. (1997) ‘The economic theory of the firm as a “case” theory of international production’, in I. Islam and W. Shepherd (eds), Current Issues in International Business, London: Edward Elgar. Dutt, A. K. and Kim, K. K. (1994) ‘Miracle miracle and state stagnation? The development experience of South Korea and India compared’, in A. K. Dutt, K. S. Kim and A. Singh (eds), The State, Markets and Developments: beyond the neoclassical dichotomy, Cheltenham: Edward Elgar. Economic Survey (2007–08) Ministry of Finance, Economic Division, New Delhi: Government of India. The Economist (1995) 27 October, London. —— (2004) ‘The economic intelligence unit’, 5 April, London. —— (2008) 11 December, London. Edadan, N. (1997) ‘Privatisation strategies in developing countries: external debt and domestic economic prospects’, Economic and Political Weekly XXXII, 27: 1608–19. Edgren, G. (ed.) (1989) Restructuring, Employment and Industrial Relations: adjustment issues in Asian industries, Geneva: ILO. Eggleston, K., Jensen, R. and Zeckhauser, R. (2002) ‘Information and communication technologies, markets and economic development’, in G. Kirkman (ed.) The Global Information Technology Report 2001–02: readiness for the networked world, World Economic Forum, Oxford: Oxford University Press, 62–74. Einhorn, B. (2003) ‘English gives India tech edge’, The Australian Financial Review, 7 July, Melbourne. Enos, J. (1989) ‘Transfer of technology in the Asia Pacific region’, Asian Pacific Economic Literature, 11, 1: 56–66. ESCAP (1995) Quality of Life in the ESCAP Region, Bangkok: ESCAP. —— (1995a) State of the Environment Report for Asia, Bangkok: ESCAP. Faaland, J. and Parkinson, J. R. (1976) Bangladesh: the test case for development, London: C. Hurst & Company. Fallon, P. R. (1986) The Effects of Labour Regulation upon Industrial Employment and

Bibliography

243

Output in India, Development Research Department Discussion Paper No. 296, World Bank: Washington, DC. Fallon, P. R. and Lucas, R. E. B. (1991) ‘The impact of changes in job security regulations in India and Zimbabwe’, The World Bank Economic Review, 5, 3: 395–413. Far Eastern Economic Review (1998) 12 March, pp. 42–4. Faruqi, S. (ed.) (1993) Financial Sector Reforms in Asian and Latin American Countries, Washington, DC: World Bank, p. 6. Fei, J. and Ranis, G. (1964) ‘Development of the labour surplus economy’, New Haven: Economic Growth Centre, Yale University. Fesharaki, F. and Wu, K. (1992) ‘Energy policies in Asian-Pacific developing countries’, Asian-Pacific Economic Literature, 6, 2: 11–41. Fields, G. (1984) ‘Employment, income distribution and economic growth in seven small open economies’, Economic Journal, 94, 1: 74–83. —— (1986) ‘Industrialization and employment in Hong Kong, Korea, Singapore and Taiwan’, in W. Galenson (ed.), Foreign Trade and Investment: economic development in the newly industrialising Asian countries, Madison: University of Washington Press. —— (1995) ‘Income distribution in developing economies: conceptual, data, and policy-issues in broad-based growth’, in M. G. Quibria (ed.), Critical Issues in Asian Development, Hong Kong: Oxford University Press. Findlay, C. and Watson, A. (1992) ‘Surrounding the cities from the countryside’, in R. Garnaut and G. Liu (eds), Economic Reform and Internationalisation: China and the Pacific region, Sydney: Allen and Unwin. Findlay, C., Martin, W. and Watson, A. (1993) Policy Reform, Economic Growth and China’s Agriculture, Paris: OECD. Findlay, R. (1995) ‘Recent advances in trade and growth theory’, in M. G. Quibria (ed.), Manila: Asian Development Bank. Fischer, S. (1995) ‘Central bank independence revisited’, American Economic Review, papers and proceedings, 85, 2: 20–206. Fishlow, A. (1990) ‘The Latin American state’, Journal of Economic Perspectives, 4, 2: 61–74. Fitzgerald, M. (1998) ‘Short-term capital flows, the real economy and income distribution in developing countries’, paper presented to the joint IEA/BEA conference, Adjustment and Beyond: the reform experience in South Asia, 20, March 30–1 April, Dhaka, Bangladesh. Foley, G. (1992) ‘Rural electrification in the developing world’, Energy Policy, 20, 2: 145–52. Forbel, F., Jurgen, H. and Otto, K. (1980) The International Division of Labour, New York: Cambridge University Press. Foster, P. J. (1966) ‘The vocational school fallacy in developing planning’, reprinted in J. H. Karabel (ed.), Power and Ideology in Education (1977), Oxford: Oxford University Press. Frain, J. C. (2004) ‘Inflation and money growth: evidence from multi-country data-set’, The Economic and Social Review, Economic and Social Studies, 53, 3: 251–66. Francien, F. (1978) India’s Political Economy 1947–1977, New Haven: Princeton University Press. Frankel, J. (1993) ‘Is Japan creating a yen bloc in East Asia and the Pacific’, in J. Frankel and M. Kahler (eds), Regionalism and Rivalry: Japan and the US in Pacific Asia, Chicago: University of Chicago Press. Reprinted in R. Garnaut and P. Drysdale (eds) (1994) AsiaPacific Regionalism – Readings in International Economic Relations, Sydney: Harper Collins. Frankel, J. A., Shang–Jin Wei, Ernesto Stein (1994) ‘APEC and other regional economic arrangements in the Pacific’, Working Paper 94–04, San Francisco: Center for Pacific

244

Bibliography

Basin Monetary and Economic Studies, Economic Research Department, Federal Reserve Bank of San Francisco. Freeman, R. B. (1993) ‘Labour market institutions and policies: Help or hindrance to economic development?’, Proceedings of the World Bank Annual Conference on Development Economics 1992, Washington, DC: World Bank. Freeman, R. B. and Medoff, J. (1984), What Do Unions Do?, New York: Basic Books. Frenkel, S. (ed.) (1993) Organised Labour in the Asia-Pacific Region: a comparative study of unionism in nine countries, Cornell International Industrial and Labour Relations Report No. 24, Ithaca, NY: ILR Press. Fries, S. (1994) ‘Trade and the environment’, in N. Kirmani et al., International Trade Policies: the Uruguay Round and beyond, Vol. II. Background Papers, Washington, DC: International Monetary Fund, 84. Fries, S. M. (1992) ‘An expensive thrift industry’, in Y. Horiguchi et al., The United States Economy: performance and issues, Washington, DC: International Monetary Fund. Fry, M. (1990) ‘Nine financial sector issues in eleven Asian developing countries’, Working Paper, IFGWP–90–09, Manila: Asian Development Bank. —— (1991) ‘Domestic resource mobilization in developing Asia: four policy issues’, Asian Development Review, 19, 1: 14–39. Fry, M. J. (1995) ‘Financial development in Asia: some analytical issues’, Asian Pacific Economic Literature, 9, 1: 38–55. Furtado, C. (1973) ‘The concept of external dependence in the study of underdevelopment’, in C. K. Wilber (ed.), The Political Economy of Development and Underdevelopment, New York: Random House. Galenson, W. (1992) Labour and Economic Growth in Five Asian Countries: South Korea, Malaysia, Taiwan, Thailand and the Philippines, New York: Praeger. Gannicott, K. (1990) ‘The economics of education in Asian-Pacific developing countries, Asian-Pacific Economic Literature, 4, 1: 41–64. Garnaut, R. (1989) Australia and Northeast Asian Ascendancy, Canberra: AGPS. Garnaut, R. and Drysdale, P. (eds) (1994) Asia-Pacific Regionalism – Readings in International Economic Relations, Sydney: Harper Collins. Garnaut, R. and Liu, G. (eds) (1992) Economic Reform and Internationalisation: China and the Pacific region, Sydney: Allen and Unwin. Garnaut, R. and Ma, G. (1993a) ‘How rich is China: evidence from the food economy’, The Australian Journal of Chinese Affairs, July, 30: 122–46. —— (1993b) ‘Economic growth and stability in China’, Journal of Asian Economics, 4, 1: 5–24. Ghosh, P. K. (ed.) (1984) Developing South Asia: a modernization perspective, New Delhi: Greenwood Press. Giovannini, A. and De Melo, M. (1993) ‘Government Revenue From Financial Repression’, American Economic Review, p. 83. Global Wireless Matrix (various issues) Merill Lynch. Goldin, I. and Mensbrugghe, D. (1995) ‘The Uruguay Round: an assessment of economywide and agricultural reforms’, a conference paper on the Uruguay Round and the developing Economies, Washington, DC: International Economics Department, World Bank. Goldsbrough, D. et al. (1996) Reinvigorating Growth in Developing Countries: lessons from adjustment policies in eight countries, Occasional Paper 139, Washington, DC: International Monetary Fund. Government of Bangladesh (GOB) (1993a) Bangladesh Economic Survey, 1992/93, Dhaka: Ministry of Finance.

Bibliography

245

—— (1993b) Bangladesh Export Strategy Dhaka: Ministry of Commerce. —— (1996) Bangladesh Economic Survey, Dhaka: Ministry of Finance. —— (1996) Economic Survey 1995/96, Dhaka: Ministry of Finance. Graham, C. and Hossain, M. (2004) ‘United Kingdom: telecommunications reform issues’, in A. Brown, M. Hossain and T. Nguyen (eds), Telecommunications Reform in the Asia Pacific Region, Cheltenham: Edward Elgar. Granovsky, A. E. (undated) Economic development in South Asia, Agricole Publishing Academy. Green, J. and Thorbecke, E. (1986) ‘A methodology for measuring food poverty: applied to Kenya’, Journal of Development Economics, 24, 1: 59–74. Grieve, R. and Haq, M. (eds) (1995) Bangladesh: strategies for development, Dhaka: University Press Ltd. Grobar, L. M. and Gnanaselvam, S. (1993) ‘The economic effects of the Sri Lankan civil war’, Economic Development and Cultural Change, 41, 2: 395–405. Grossman, G. M. and Helpman, E. (1990) ‘Trade, innovation and growth’, American Economic Review, 2. Guhan, S. (1995) The World Bank’s Lending in South Asia, Brookings Occasional Papers, Washington, DC: The Brookings Institution. Gulati, A. (1994) ‘India Poised for Take Off – Reforms in Trade, Industry and Agriculture: Stock-taking and future challenges’, paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asian Research Centre, Australian National University, Canberra. Gupta, D. (2008) ‘The changing villager’, Seminar paper. Haggard, S. (1988) ‘The politics of industrialization in the Republic of Korea and Taiwan’, in Hughes, H. (ed.), Achieving Industrialization in Asia, Cambridge: Cambridge University Press. —— (1990) Pathways from the Periphery: politics of growth in the newly industrialising countries, Ithaca, NY: Cornell University Press. —— (1994) ‘Conclusion’, in A. J. MacIntyre (ed.), Government and Business in Industrialising Asia, Ithaca, NY: Cornell University Press. Haggard, S. and Moon, C. (1990) ‘Institutions and economic policy: theory and a Korean case study’, World Politics, 42, January: 210–37. Haggard, S. and Webb, S.B. (1993) ‘What do we know about the political economy of economic policy reform?’, The World Bank Research Observer, 8, 2: 143–68. Hammer, J. S. and Shetty, S. (1995) East Asia’s Environment: principles and priorities for action, Washington, DC: World Bank Discussion Paper No. 287. Hansen, Z. (2002) Population control in India, Colby College, USA. <www.colby.edu>. Haq, M. (1997) Human Development in South Asia 1997, Oxford: Oxford University Press. Haq Mahbub-ul Human Development Centre (2008) South Asian Human Development Report, Islamabad: Mahbub-ul Haq Development Centre. Haq Mahbub-ul Development Centre (2007) Human Development in South Asia 2007: A Ten Year Review, Islamabad and Oxford: Oxford University Press. Hardy, A. (1980) ‘The role of telephone in economic development’, Telecommunications Policy, 5, 4: 278–86. Hassan, M. K. (1997) ‘The review of financial sector reform in Bangladesh’, in R. Sobhan (ed.), Growth or Stagnation: a review of Bangladesh’s development in 1996, Dhaka: CPD/University Press Ltd. Hassan, R. M. and Babu, S. C. (1991) ‘Measurement and determinants of rural poverty: household consumption patterns and food poverty in rural Sudan’, Food Policy 6, 6: 451–60.

246

Bibliography

Hayami, Y. (1982) ‘Growth and Equity: Is there a trade-off?’, presented in the 18th International Conference of Agricultural Economists, Jakarta. Hayami, Y. and Ruttan, V. (1971) Agricultural Development: an international perspective, Baltimore: Johns Hopkins University Press. Helliwell, D. (1994) ‘Empirical linkages between democracy and economic growth’, British Journal of Political Science, 24. Herath, G. and Sharma, K. (2007) Child Labour in South Asia, Ashgate Publishing Ltd, UK Hicks, G. (1989) ‘The Four Little Dragons: an enthusiast’s reading guide’, Asian-Pacific Economic Literature, 3, 2: 35–49. Hill, H. (1990) ‘Foreign investment and East Asian economic development’, Asian Pacific Economic Literature, 4, 2: 21–58. —— (1992) ‘Manufacturing industry’, in A. Booth (ed.), The Oil Boom in Asia: Indonesian economic policy and performance in the Soeharto era, Singapore: Oxford University Press. —— (1996) The Indonesian Economy Since 1966: South East Asia’s emerging giant, Cambridge: University Press. Hinds, M. (1988) ‘Economic effects of financial crises’, PPR Working Paper WPS 104, Washington, DC: World Bank, EMENA. Ho, S. P. S. (1984) ‘Colonialism and development: Korea, Taiwan, Kwantung’, in Myers and Petrie (eds), The Japanese Colonial Empire, 1895–1945, Princeton, New Jersey: Princeton University Press. Hoffmeister, A. W. and Schinasi, G. J. (1995) ‘Asset prices, financial liberalization and inflation in Japan’, in U. Baumgartner and G. Meredith (eds), Saving Behavior and the Asset Price ‘Bubble’ in Japan, Occasional Paper 124, Washington, DC: International Monetary Fund. Hollands, M. (2004) ‘Status of offshore outsourcing in Australia: a qualitative study’, report commissioned by the Australian Information Industry Association (AIIA), Canberra. Hossain, A. and Chowdhury, A. (1995) Monetary and Financial Policies in Developing Countries; Growth and Stabilization, London: Routledge. Hossain, A. and Rashid, S. (1996) In Quest of Development: the political economy of South Asia, Dhaka: University Press Ltd. —— (1997) ‘Financial Sector Reform’, in M. G. Quibria (ed.), The Bangladesh Economy in Transition, Manila: Asian Development Bank. Hossain, M. M. (1994) ‘A longitudinal poverty profile and economic policies in a Bangladesh village, 1980–1990’ paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. —— (1998) ‘Liberalization and privatization: India’s telecommunications reform’, in M. M. Hossain and J. Malbon (eds), Who Benefits from Privatization?, London and New York: Routledge, pp. 213–23. —— (2003) ‘Development through democratization and decentralization: the case of Bangladesh’, South Asia: Journal of South Asian Association of Australia, 26, 3: 297–308. —— (2003) ‘Globalisation and the growth of India’s “New Economy”’, presented at the 3rd International Convention of Asia Scholars held in Singapore, National University of Singapore, 19–22 August. —— (2004) ‘India: a case study’, presented to the international workshop on ‘The New Economy, Knowledge Management and Growth in India and Ireland: What implications for Australia?’, Griffith Asia Institute, Griffith University, Nathan, 5 October. —— (2009) Democracy’s Roller Coaster Ride in Bangladesh, Dhaka: University Press Ltd.

Bibliography

247

Hossain, M. M. and Chatterjee, S. (1996) ‘India’s liberalisation in communications: some preliminary observations’, conference proceedings of the Asian Studies Association of Australia Inc., LaTrobe University, Melbourne. Hossain, M. M. and Kathuria, R. (2004) ‘Telecommunications reform and the emerging “new” economy: the case of India’, World Review of Science, Technology and Sustainable Development, 1, 2: 171–91. Hossain, M. M. and Maswood, S. (2005) WTO Agriculture Negotiations: an assessment of Australian position in Doha Round, Joypur: CUTS, Electronic. Hossain, M. and Mukhpadhyay, H. (2001) ‘Currency crisis: a South Asian perspective’, The Review of Asian and Pacific Studies, 21: 15–34. Hossain, M. M., Islam, I. and Kibria, R. (1999) South Asian Economic Development: transformation, opportunities and challenges, London and New York: Routledge. Hossain, M. M., Nabi, A. K. M. and Islam, I. (eds) (2003) Bangladesh’s Development Agenda and Vision 2020: Rhetoric or reality?, Dhaka: University Press Ltd. Hossain, M. M., Selvanathan, E. and Selvanathan, G. (2004) ‘ARC project proposal for 2004 round’, Griffith University, Brisbane. Hossain, M. S. (2008) ‘Global warming, local impact’, The Daily Star, Dhaka, 13 September. http://country-studies.com/india/population-and-family-planning-policy.html. http://www.indiaeyewitness.com. Houghton, J. W. (2003) Australian ICT Trade Update 2003, Centre for Strategic Economic Studies, Victoria University, Melbourne. Hunter, J. and Loannidis, C. (2001) A Review of Ramsey Prices for Mobile Services, London: BT Cellnet, .ecn and Oftel. Hussain, Z. (2003) ‘MNCs eye brains and bottom line’, The Straits Times, 23 August, Singapore. ILO (1991) World Labour Report 1991, Geneva: International Labour Organisation. —— (1995) World Labour Report 1995, Geneva: International Labour Organisation. IMF Balance of Payments Yearbook (several issues), Washington DC: International Monetary Fund. —— (2004) World Employment Report 2004–2005, Employment, Productivity and Poverty Reduction, Geneva. Inayatullah, S. (1992) ‘Introducing the futures of South Asia’ Futures, November: 851–7. —— (1992a) ‘Images of Pakistan’s future’, Future, November: 867–73. Information Office (2008) China’s Policies and Actions for Addressing Climate Change, excerpts from The China Daily, <www.chinadaily.com.au> International Herald Tribune, (1997) ‘Tokyo Rescue of Two Banks Clouds System’s Future’, 4 February: 1. International Telecommunications Union (1999) Trends in Telecommunications Reform 1999, Geneva: International Telecommunications Union. —— (2008) World Telecommunication/ICT Indicators, 12th edn, Geneva: International Telecommunications Union. Islam, A. (1998) ‘The crisis in East/South-East Asia: the underlying causes and policy lessons’, paper presented to the joint BEA/IEA conference on ‘Adjustment and Beyond: the reform experience in South Asia’, Dhaka, 30 March–1 April. Islam, I. (1992) ‘Political economy and East Asian economic development’, Asian-Pacific Economic Literature, November, 6, 2: 69–101. Islam, N. (1978) Development Strategy of Bangladesh, London: Pergamon Press.

248

Bibliography

James, W. E., Naya, S. and Meier, G. M. (1989) Asian Development: economic success and policy lessons, Madison: University of Wisconsin Press. Jennings, I. (1950) The Economy of Ceylon, Oxford: Oxford University Press. Jensen, R., Eggleston, K. and Zeckhauser, R. (2002) ‘Information and communication technologies, markets, and economic development’, Discussion Paper 0203, Department of Economics, Boston: Tufts University. Jiggins, J. (1976) ‘Dismantling Welfarism in Sri Lanka’, Overseas Development Review, 2. Jimenez, E. (1990) ‘Social sector pricing revisited: a survey of some controversies’, Proceedings of the World Bank Annual Conference on Development Economics 1989, Washington, DC: World Bank. Jorgenson, D. and Wilcoxen, P. (1990) ‘Environmental regulation and US economic growth’, Rand Journal of Economics, Summer: 314–40. Joshi, V. and Little, I. M. D. (1994) India: macroeconomics and political economy 1964–1991, Washington, DC and New Delhi: World Bank and Oxford University Press. —— (1996) India’s Economic Reforms 1991–2001, Oxford: Oxford University Press. Juoro, U. (1993) ‘Financial liberalization in Indonesia’, ASEAN Economic Bulletin. Kaminsky, G. L. and Reinhart, C. M. (1996) ‘The Twin Crises; the underlying causes and policy lessons’, International Finance Discussion Paper, Board of Governors of the Federal Reserve System. Kardar, S. (1994) ‘Privatisation in Pakistan’, paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. Kasa, K. (1997) ‘Does Singapore Invest Too Much’, Federal Reserve bank of San Francisco Economic Letter, No. 97–15, 15 May. Kathuria, R. (2000) ‘Telecom policy reforms in India’, Global Business Review, 1, 2: 301–26. —— (2004) ‘Trade in telecommunications services – opportunities and constraint’, Working Paper 149, New Delhi: ICRIER. —— (2007) ‘Telecom liberalisation: a case study of India’s experience with regulation’, in Jaivir Singh (ed.), Regulation, Institutions and the Law, New Delhi: Social Science Press. Kay, J. and Vickers, J. (1988) ‘Regulatory reform in Britain’, Economic Policy, October. Keesing, D. B. (1967) ‘Outward-looking policies and economic development’, Economic Journal, June. Khan, A. A. (1993) Bangladesh Labour and Industrial Law, Dhaka: Pragati Prakashani. Khan, A. (1996) Economic Development, Poverty Alleviation and Governance: the Asian experience, Aldershot: Avebury. —— (2007) Drying up of a Riverine Delta, New York: UNEP Khan, M. H. and Khan, S. S. (1992) Rural Change in the Third World: Pakistan and the Aga Khan Rural Support Programme, Karachi: Greenwood Publishing Group. Khan, S. I., Islam, S. A. and Hague, M. I. (2008) Political Culture, Political Parties and Democratic Transition in Bangladesh, Dhaka: University Press Ltd. Khan, S. R. (1994) ‘Exchange rate liberalisation in Pakistan’ paper presented to the conference on Economic Liberalization in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. Killick, A. and Bird, G. (1984) The IMF and Stabilization: developing country experiences, New York: St Martin’s Press. King, R. G. and Levine, R. (1993) ‘Finance and growth: Schumpeter might be right’, Quarterly Journal of Economics, 108: 717–37. Kingsley, G. T., Ferguson, B. W., Bower, B.T. and Dice, S. R. (1994) Managing Urban

Bibliography

249

Environmental Quality in Asia, World Bank Technical Paper No. 220, Washington, DC: World Bank. Kirkpatrick, C. H. (1997) ‘Privatization and public enterprise reform in the Asia-Pacific region: introduction and overview’, Journal of the Asia Pacific Economy, 2, 2: 201–24. Kohli, A. (1986) ‘Democracy and development’, in J. Lewis and Kallab, V. (eds), Development Strategies Reconsidered, Washington, DC: Overseas Development Council. —— (1990) Democracy and Discontent: India’s growing crisis of governability, New York: Cambridge University Press. —— (1993) ‘Democracy amid economic orthodoxy: trends in developing countries’, Third World Quarterly, 14, 4: 671–91. —— (1994) ‘Centralisation and powerlessness: India’s democracy in a comparative perspective’, in J. Migdal, A. Kohli and V. Shue (eds), State Power and Social Forces: domination and transformation in the third world, Cambridge: Cambridge University Press. Korea Focus (1995) Seoul: Korea Foundation. —— (1997) Seoul: Korea Foundation. Krishna, S. (1992) ‘Oppressive pasts and desired futures: re-imagining India’ Futures, November: 858–66. Krueger, A. (1986) ‘General issues in economic liberalization’, in Choksi and Papageorgiou (eds), Economic Liberalization in Developing Countries, Oxford: Basil Blackwell. Krueger, A. O. (1993a) Political Economy of Policy Reform in Developing Countries, Cambridge, MA: MIT Press. —— (1993b) ‘Free trade agreements as protectionist devices: rules of origin’, Working Paper no. 4352, National Bureau of Economic Research (NBER), April. Krugman, P. (1987) ‘Is free trade passe’?, Journal of Economic Perspectives, 1, 2: 131–44. —— (1991) ‘The move towards free trade zones’, in Policy Implications of Trade and Currency Zones, a symposium sponsored by the Federal Reserve Bank of Kansas City, Wyoming, August: 7–42. Reprinted in R. Garnaut and P. Drysdale (eds) (1994) AsiaPacific Regionalism: readings in international economic relations, Sydney: HarperCollins. —— (1994) The Age of Diminished Expectations, Cambridge, MA: MIT Press. —— (1998) ‘Fire-Sale FDI’, . Kwan, Y. (1996) ‘Korean economic development and prospects’, Asian Pacific Economic Literature, 11: 15–39. Lakshman, W. D. (1994) ‘Structural adjustment policies in Sri Lanka: imbalances, structural disarticulation and sustainability’ paper presented to the conference on Economic Liberalization in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. Lal, A. (1994) ‘Impact of Uruguay Round Agreements on Less Developed Countries’ Exports: an initial assessment’, Washington, DC: World Bank, International Economic Department. Lal, D (1987) ‘The political economy of economic liberalization’, World Bank Economic Review, 1, 2. —— (1988) ‘Ideology and industrialization in India and East Asia’, in H. Hughes, (ed.), Achieving Industrialization in East Asia, Melbourne: Cambridge University Press. —— (1988a) The Hindu Equilibrium, vol. 1: cultural stability and economic stagnation, Oxford: Clarendon Press. —— (1995) ‘India and China: contrasts in economic liberalization?’, World Development, 23, 9: 1475–94. Lal, D. and Myint, H. (1995) The Political Economy of Poverty, Equity and Growth: a comparative study, Oxford: Clarendon Press.

250

Bibliography

Lal, D. and Rajapatirana, S. (1987) ‘Foreign trade regime and economic growth in developing countries’, World Bank Research Observer, 2, 2: 189–218. Lall, S. (1994) ‘Industrial policy: the role of government in promoting industrial and technological development’, UNCTAD Review pp. 65–90, Geneva: UN. Landes-Mills, P. and Serageldin, I. (1992) ‘Governance and the external factor’, Proceedings of the World Bank Annual Conference on Development Economics 1991, World Bank: Washington, DC. Lee, C. H. (1992) ‘The government, financial system and large enterprises in the economic development of South Korea’, World Development, February. Lee, E. (1984) ‘Introduction’, in E. Lee (ed.), Export Processing Zones and Industrial Employment in Asia, Bangkok and Geneva: ILO-ARTEP. Leeahtam, P., Patrawimolpon, P. and Supapongse, M. (1992) ‘Monetary policy in Asian economic development’, Asian Development Review, Manila: Asian Development Bank. Leipziger, D. M. and Thomas, V. (1993) ‘An overview of country experiences’, in Lessons of East Asia Series, Washington, DC: World Bank. Lewin, K. M. and Berstecher, D. (1989) ‘The costs of recovery: are user fees the answer?’ IDS Bulletin, 20, 1: 59–71. Lewis, P., Garnett, A., Hawtrey, K. and Treadgold, M. (2003) Issues, Indicators and Ideas: a guide to the Australian economy, 3rd edn, Frenches Fores: Addison-Wesly. Lewis, W. A. (1955) ‘Economic Development with Unlimited Supplies of Labour’, Paper presented at The Manchester School, May, 139–91. —— (1955a) Theory of Economic Growth, London: Unwin University Books. Lidman, R. and Domeres, R. J. (1970) ‘India’, in W.A. Lewis (ed.), Tropical Development, 1880–1913, Studies in Economic Progress, London: Allen and Unwin. Liew, L. (1993) ‘Gradualism in China’s Economic Reforms and the Role of a Strong, Central State’, mimeo, Faculty of Asian and International Studies, Griffith University, Brisbane, Australia. —— (1995) ‘Gradualism in China’s economic reform and the role for a strong central state’, Journal of Economic Issues, XXIX: 883–95. Lim, D. (1983) ‘Another look at growth and defense expenditure’, Economic Development and Cultural Change, 35: 179–96. —— (1983a) ‘Fiscal incentives and direct foreign investment in less developed countries’, The Journal of Development Studies, 19, 2: 207–12. —— (1991) ‘Why growth performances differ between Asian countries’, Research Lecture, Brisbane: Griffith University. —— (1994) ‘Explaining the growth performances of Asian developing economies’, Economic Development and Cultural Change, 42, 4: 829–44. —— (1995) Explaining Economic Growth, London: Edward Elgar Publishing. Lipton, M. and Toye, J. (1990) Does Aid Work in India: a country study of the impact of official development assistance, London: Routledge. Little, I., Scitovsky, T. and Scott, M. (1970) Industry and Trade in Some Developing Countries: a comparative study, London: Oxford University Press. Little, I. M. D. (1981) ‘The experiences and causes of rapid labour-intensive development in Korea, Taiwan Province, Hong Kong and Singapore and the possibilities of emulation’, in E. Lee (ed.), Export-led Industrialization and Development, Bangkok and Geneva: ILO-ARTEP. Little, I. M. D. and Joshi, V. (1994) India: macroeconomics and political economy, Washington, DC: World Bank.

Bibliography

251

Little, I. M. D. and Mirlees, J. (1991) ‘Project appraisal and planning twenty years on’, Proceedings of the World Bank Annual Conference 1990, Washington, DC: World Bank. Little, I. M. D., Cooper, R. N., Corden, W. M. and Rajapatirana, S. (1993) Boom, Crisis and Adjustment: the macroeconomic experience of developing countries, New York: Oxford University Press for the World Bank. Lohmann, S. (1992) ‘Optimal commitment in monetary policy: credibility versus flexibility’, American Economic Review, 82, 1: 273–86. Low, P. and Yeats, A. (1992) ‘Do dirty industries migrate’?, in P. Low (ed.), International Trade and the Environment, Washington, DC: World Bank Discussion Paper No. 159. Lucas, R. E. Jr. (1988) ‘On the mechanics of economic development’, Journal of Monetary Economics, 10, 1. —— (1990) ‘Why does not capital flow form rich to poor countries’, American Economic Review, 80, 2: 92–96. Lucas, R. E., Wheeler, D. and Hettige, H. (1992) ‘Economic development, environmental regulation and the international migration of toxic industrial pollution: 1960–88’, in P. Low (ed.), International Trade and the Environment, Washington, DC: World Bank Discussion Paper No. 159. Lucas, R. E. B. (1986) ‘An Overview of the Labour Market in India’, Development Research Department, Discussion Paper No. 153, World Bank: Washington, DC. Lucas, R. E. B. and Papanek, G. (1988) The Indian Economy: recent developments and future prospects, Boulder, CO.: Westview Press. MacIntyre, A. J. (1990) Business and Politics in Indonesia, Sydney: Allen and Unwin. —— (1994) ‘Indonesia, Thailand and the Northeast Asia Connection’, in R. Higgott, R. Leaver and J. Ravenhill (eds), Pacific Economic Relations in the 1990s: Conflict or cooperation?, Sydney: Allen and Unwin. MacIntyre, A. J. and Jayasuriya, K. (eds) (1992) The Dynamics of Economic Policy Reform in Southeast Asia and the Southwest Pacific, Singapore: Oxford University Press. Mackenzie, G.A. and Stella, P. (1996) Quasi-Fiscal Operations of Public Financial Institutions, Occasional Paper 142, Washington, DC: International Monetary Fund. MacNamara, R. (1973) Speech at the Annual Meetings of the Board of Governors of the World Bank Group and the IMF, Nairobi, Kenya. Mackie, J. (1988) ‘Economic growth in the ASEAN region: the political underpinnings’, in H. Hughes (ed.), Achieving Industrialisation in East Asia, Cambridge: Cambridge University Press. Madan, D. K. (1996) Indo-Bangladesh Economic Relations and SAARC, Dhaka: Tyk Prokason. Madden, G., Savage, S. J. (1998) ‘CEE telecommunications investment and economic growth’, Information Economics and Policy, 10: 173–95. Maitra, P. (1991) Indian Economic Development, New Delhi: South Asia Books. Majumder, S. K. and Ahuj, G. (1997) ‘Privatisation: an exegesis of key ideas’, Economic and Political Weekly XXXII, 27: 1590–95. Manning, C. and Fong, P. E. (1990) ‘Labour market structures in ASEAN and the East Asian NIEs’, Asian-Pacific Economic Literature, 4, 2: 59–81. Market Information Survey of Households (MISH) (2007) National Council for Applied Economic Research (NCAER), New Delhi. Mascarenhas, A. (1986) Bangladesh A Legacy of Blood, London: Hodder and Stoughton.

252

Bibliography

Mason, E. S. (1980) Economic Development in India and Pakistan, Cambridge, MA: AMS Press. McGillivray, M. and Howard, W. (1994) ‘Structural adjustment and macroeconomic performance in Pakistan’, paper presented to the conference on Economic Liberalisation in South Asia, Australia South Asia Research Centre, Australian National University, Canberra. McKinnon, R. (1973) Money and Capital in Economic Development, Washington, DC: Brookings Institution. —— (1984) ‘Pacific Growth and Financial Interdependence: an overview of bank regulation and monetary control’ Pacific Economic Papers, 117, Research School of Pacific Studies, Australian National University. —— (1988) ‘Financial liberalization in retrospect: interest rate policies in LDCs’, in G. Ranis and P. Schultz (eds), The State of Development Economics, Oxford: Basil Blackwell. Meadows, D. H. (1992) Beyond the Limits, London: Chelsea Green Publishing. Meadows, D. H., Randers, J. and Behrns III, W.W. (1972) The Limits to Growth, New York: Universe Books. Measures to Improve Telecom Penetration in Rural India – The next 100 million subscribers, TRAI, December 2008, New Delhi. Mehmet, O. (1988) Human Resource Development in the Third World: cases of success and failures, Kingston, ON: Ronald P. Frye and Co. Mehta, M. C. (1996) ‘Judicial Activism’, in The Hindu Survey of the Environment ‘96, New Delhi. Metcalf, D. (1985) ‘The economics of vocational training: past experience and future considerations’, World Bank Staff Working Paper 713, Washington D.C. Metcalfe, I. (2003) ‘Long term environmental issues for Bangladesh, in M. Hossain, A. K. M. Nabi and I. Islam (eds) Bangladesh’s Development Agenda and Vision 2020: Rhetoric or reality?, Dhaka: University Press Ltd. Mia, M. B. (2008) ‘Effects of global warming’, The Daily Star, 6 June, Dhaka, . Michaelis, P. (1992) ‘Environmental policy in OECD countries: lessons for ASEAN’, ASEAN Economic Bulletin, 9, 2: 169–86. Mingat, A. and Tan, J. P. (1988) ‘The Economic returns to investment in project-related training’, International Review of Education, XXXIV, 2: 225–40. Mittal, S. (2008) ‘Demand-supply trends and projections of food in India’, Working Paper No. 209, New Delhi: ICRIER. Mittals, S. and Mukherjee, A. (2008) Food for Policy: reforming agriculture, New Delhi: ICRIER Publications. Mondol, M. A. S. (1992) ‘Impact of new technology in production variability in Bangladesh agriculture’, Bangladesh Journal of Agricultural Economics, 18, 2: 1–13. —— (ed.) (2000) Changing Rural Economy of Bangladesh, Dhaka: Bangladesh Economic Association. Montek, A. (2000) State Level Performance Under Economic Reforms in India, Mimeo, New Delhi. Morrissey, J. (2004) ‘Ireland: a case study’, presented at the international workshop on The New Economy, Knowledge Management and Growth in India and Ireland: What implications for Australia?’, Griffith Asia Institute, Griffith University, Nathan, 5 October. Mosely, P., Harrigan, J. and Toye, J. (1991) Aid and Power: the World Bank and policy-based lending, vol. 1: analysis and policy proposals, London: Routledge.

Bibliography

253

Mosher, S. W. (2008) Population control: Real costs, illusory benefits, Transaction publications, USA, pp. 270 Munasingh, M. (1992) ‘Discussion on the environment and emerging development issues’, Proceedings of the World Bank Annual Conference on Development Economics 1992, Washington, DC: World Bank. Munasingh, M. and Cruz, W. (1995) Economywide Policies and the Environment, Washington, DC: World Bank Environment Paper No. 10. Narasimham, M. (1991) Report of the Committee on the Financial System, New Delhi: Government of India. Nasim, A. (1993) Financing Pakistan’s Development in the 1990s, Karachi: Oxford University Press. Nasreen, M. (2008) ‘Climate change and food security’, The Daily Star, 27 December, Dhaka, . Nasscom (2002a) Indian IT Industry: learning from China, New Delhi: National Association of Software and Service Companies. —— (2002b) Software Industry in India, 2001–2002, New Delhi: National Association of Software and Service Companies. —— (2003) Software Industry in India, 2002–2003, New Delhi National Association of Software and Service Companies. —— (2004a) Strategic Review 2004: the IT industry in India, New Delhi: National Association of Software and Service Companies. —— (2004b) Quality Summit 2004: quest for excellence, Bengelore: National Association of Software and Service Companies. Nasscom and McKinsey (2002) Nasscom and McKinsey Report 2002: strategies to achieve the Indian IT industry’s aspiration, Nasscom in support with Ministry of Communications and Information Technology, New Delhi: Government of India. Nasscom’s Handbook (2002) IT Enabled Services, Background and Reference Resource, New Delhi: Nasscom. —— (2002a) IT Enabled Services, Background and Reference Resource, New Delhi: Nasscom. The Nation (2009) $60 million population control programme launched, English Daily, Karachi. Nelson, J. (1991) ‘Organised labour, politics, and labour market flexibility in developing countries’, The World Bank Research Observer, 6, 1: 37–56. New Scientist (2005) India special: the next knowledge superpower, <www.newscientist. com>, 19 February. Noman, O. (1988) The Political and Economic Development of Pakistan, London: Routledge. —— (1995) ‘Poverty and income distribution under structural adjustment in Pakistan’, an economic research seminar paper presented in the Institute of Social Studies (ISS), February, The Hague. North, D. (1994) ‘Economic performance through time’, American Economic Review, 84, 3: 359–68. Norton, S. W. (1992) ‘Transaction costs, telecommunications and the microeconomics of macroeconomic growth’, Economic Development and Cultural Change, 41, 1: 175. Nugent, J. B. (1991) ‘The demise of economic development in Latin America and its implications for other developing countries’, Journal of Economic Development, 16 (June): 7–35. OECD (2001) The New Economy, Beyond the Hype, Paris: OECD.

254

Bibliography

—— (2005) Economic Survey of Australia 2004: product market, competition and Economic performance, Paris: OECD. OFTEL (2003) ‘Wholesale mobile voice call termination: proposals for the identification and analysis of markets, determination of market power and setting of SMP conditions’, December, London: Office of Telecommunications. Ogawa, N., Jones, G. W. and Williamson, J. G. (eds) (1993) Human Resources in Development Along the Asia-Pacific Rim, Singapore: Oxford University Press. Ogus, A. (1997) Regulation: legal form and economic theory, Oxford: Clarendon Press. Ohmae, K. (1990) The Borderless World, Sydney: Harper Collins. O’Malley, W. (1988) ‘Culture and industrialization’, in H. Hughes (ed.), Achieving Industrialization in East Asia, pp. 327–43, Cambridge: Cambridge University Press. Onslow, C. (ed.) (1965) Asian Economic Development, London: Weidenfield and Nicholson. Osmani, S. R. (1994) ‘Is there a conflict between growth and welfarism? The significance of the Sri Lanka debate’, Development and Change 25, 2. Otani, I. and Villaneuva, D. (1989) ‘Major determinants of long-term growth in LDCs’, Finance and Development, September: 36–38. Ozawa, T. (1992) ‘Investment between Japan and the EC: income similarity, technological congruity and economics of scope’, in A. Cantwell (ed.), Multinational Investment in Modern Europe Strategic Interaction in the Integrated Community, Aldershot: Edward Elgar. Palmer, T. N. and Raisanen, J. (2002) ‘Quantifying the risk of extreme seasonal precipitation events in a changing climate’, Nature, 415: 512–14. Panagariya, A. (2003) ‘South Asia: Does Preferential Trade Liberalization Make Sense?’ Mimeo: Centre for international Economics, University of Maryland, Maryland. Panayotou, T. (1992) ‘Environmental Kuznets Curve: empirical tests and policy implications’, mimeo, Cambridge, MA: Harvard Institute for International Development. Panchamukhi, V. R. (1990) Economic Cooperation in the SAARC Region: potentials, constraints and policies, New Delhi: Interest Publications. Pangestu, M. (1991) ‘Macroeconomic management in the ASEAN countries’, in M. Ariff (ed.), The Pacific Economy: growth and external stability, Sydney: Allen and Unwin. Papageorgiou, D., Michaely, M. and Choksi, A. (1991) Liberalizing Foreign Trade, Vol. 7: lessons of experience in the developing world, Washington, DC: The World Bank. Papanek, G. (1967) Pakistan’s Development: social goals and private incentives, Cambridge, MA: Harvard University Press. —— (1985) Development Strategy, Growth, Equity, and the Political Process in Southern Asia, Washington, DC: US Agency for International Development. Papanek, G. F. (1986) Lectures on Development Strategy, Growth, Equity and the Political Process in Southern Asia, Islamabad: Pakistan Institute of Development Economics. Park, C. Y. and Woo, J. (2002) ‘New economy and the effects of industrial structures on international equity market correlations’, ERD Working Paper Series No 31, Manila: Asian Development Bank, December. Patrick, H. T. (1994) ‘Comparisons, contrasts and implications’, in H.T . Patrick and Y. C. Park (eds), Financial Development of Japan, Korea and Taiwan; Growth, Repression and Liberalization, New York: Oxford University Press. Patrinos, H. A. (1994) ‘Socio-economic background, schooling experience, ability and monetary rewards in Greece’, Economics of Education Review, 13, 4: 321–7.

Bibliography

255

Pencavel, J. (1995) ‘The role of labour unions in fostering economic development’, Policy Research Working Paper Series 1469, Washington D.C.: The World Bank. Perkins, D. H. (1994) ‘There are at least three models of East Asian development’, World Development, 22, 4: 655–61. Petri, P. A. (1994) ‘The East Asian trading bloc: an analytical history’, in R. Garnaut and P. Drysdale (eds), Asia Pacific Regionalism: readings in international economic relations, Pymble: Harper Educational Publishers. Pigato, M., Farah, C., Itakura, K., Jun, K., Martin, W., Murrell, K. and Srinivagan, T. A. (1997) South Asia’s Integration into the World Economy, Washington, DC: World Bank. Ponnambalam, S. (1990) Dependent Development in Crisis: the Sri Lankan economy, London: Zed Press. Power, J. H. (1963) ‘Industrialization in Pakistan: A case of frustrated take-off?’, Pakistan Development Review, Summer. Prezeworski, A. (1995) ‘Comments on the impact of constitutions on economic performance’, Proceedings of the World Bank Annual Conference on Development Economics 1994, Washington, DC: World Bank. Prezeworski, A. and Limongi, F. (1993) ‘Political regimes and economic growth’, Journal of Economic Perspectives, 7: 51–69. PricewaterhouseCoopers (PwC) (2007) ‘India GSM cellular benchmarking study’, New Delhi: PwC. Prothom, A. (2009) Growth of population 1 by Shishir Kumar, Bangla Daily, Dhaka. Psacharopoulos, G. (1973) Returns of Education: an international comparison, Amsterdam: Elsevier. —— (1981) ‘Education and structure of earnings in Portugal’, The Economist, 129, 4: 532–45. —— (1985) ‘Returns to education: a further international update and implications’, Journal of Human Resources, 20: 583–97. —— (1994) ‘Returns to investment in education: a global update’, World Development, 22, 9: 1325–42. Psacharopoulos, G. and Jimenez, E. (1989) ‘Financing education in developing countries’, IDS Bulletin, 20, 1. Pyatt, F. G. and Roe, A. (1977) Social Accounting for Development Planning with Special Reference to Sri Lanka, Cambridge: Cambridge University Press. Quibria, G. (ed.) (1994) Rural Poverty in Developing Asia, Volume 1, Bangladesh, India and Sri Lanka, Manila: Asian Development Bank. Quibria, M. G. (1993) ‘The gender and poverty nexus: issues and policies’, Economics Staff Paper No. 51, Manila: Asian Development Bank. Raghavan, S. N. (1990) Macroeconomic Performance and Policy Framework in the SAARC Countries: a review, New Delhi: Interest Publications. Raghunathan, V. K. (2003) ‘India gains from job shift’, The Straits Times, 23 August, Singapore. Rahman, M. (1995) Structural Adjustment and Employment of Workers: public policy issues and choices for Bangladesh, Dhaka: University Press Limited. Rajcoomar, S., Bell, M., Karlik, J., Martin, M. and Sisson, C. (1996) Financial Programming and Policy: the case of Sri Lanka, IMF Institute, Washington, DC: International Monetary Fund. Ramanayake, D. (1984) ‘The Katunayake Investment Promotion Zone: a case study’, Colombo: Ministry of Plan Implementation.

256

Bibliography

Ramaswamy, K. and Renforth, W. (1994) ‘Evaluating the performance of state-owned enterprises and privately-owned firms: the Indian experience’, Academy of Management Proceedings’, 297–301. Ranis, G. (1981) ‘Challenge and opportunities posed by Asia’s superexporters: implications for manufactured exports from Latin America’, in W. Bower and M. Collins (eds), Export Diversification and the New Protectionism: the experiences of Latin America, Champaign: University of Illinois. Rao, A. J. (2001) A holistic approach to population control in India, Journal of Bio-Science, suppl. Indian Academy of Sciences, 26 (4), 421–23. Rao, V. (1988) ‘Income distribution in East Asian developing countries’, Asian Pacific Economic Literature, 2, 1: 26–45. Rausser, G. (1992) ‘Predatory vs productive government: the case of US agricultural policies’, Journal of Economic Perspectives, 6, 3: 133–58. Repetto, R. (1995) ‘Trade and sustainable development’, in M. G. Quibria (ed.), Critical Issues in Asian Development, Hong Kong: Oxford University Press. Rhee, Y. W. and Belot, T. (1990) Export Catalysts in Low-Income Countries: a review of eleven success stories, World Bank Discussion Paper, Washington D.C.: World Bank. Ribeiro, J. (1991) ‘India: a big country with big plans and big problems’, Electronic Business 17, 4: 65–9. Robinson, E. A. G. (ed.) (1974) Economic Development of Bangladesh within a Socialist Framework, London: Macmillan. Robinson, E. A. G. and Kidron, M. (eds) (1970) Economic Development in South Asia, London: Macmillan. Robinson, E. A. G. and Kodrow, M. (eds), Economic Development in South Asia, New York: St Martin’s Press. Robison, R. (ed.) (1996) Pathways to Asia, The Politics of Engagement, Sydney: Allen and Unwin. Rodan, G. (1994) ‘Reconstructing division of labour: Singapore’s new regional emphasis’, in R. Higgott, R. Leaver and J. Ravenhill (eds), Pacific Economic Relations in the 1990s: Conflict or cooperation?, Sydney: Allen and Unwin. Rodrigo, C. (1988) ‘Employment, wages and income distribution in Sri Lanka’, ARTEP Working Paper, New Delhi: ILO. Rodrik, D. (1992) ‘The limits of trade policy reform in developing countries’, Journal of Economic Perspectives 6, 1: 87–105. —— (1993) ‘The positive economics of policy reform’, The American Economic Review, papers and proceedings, 83, 2: 357–61. —— (1993a) ‘Trade and industrial policy reform in developing countries: a review of recent theory and evidence’, NBER Working Paper No. 4471. Röller, L. H. and Waverman, L. (1996) ‘Telecommunications infrastructure and economic development: a simultaneous approach’, discussion paper, Berlin: Social Science Research Centre. —— (2001) ‘Telecommunications infrastructure and economic development: a simultaneous approach’, The American Economic Review, 91, 4: 909–23. Romer, P. (1986) ‘Increasing returns to long-run growth’, Journal of Political Economy, 94, 5: 1002–35. —— (1990) ‘Are nonconvexities important for understanding growth?’, American Economic Review, 80, 2: 202–06. Rondinelli, D. A. (1994) ‘Thailand’s expanding markets for environmental technology and services’, Journal of Asian Business, 10, 1: 1–24. Rorh, R. E (1987) ‘Environmental management education: a model for sustainable natural

Bibliography

257

resources development’, in D.P. Southgate and F.J. Disinger (eds), Sustainable Resource Development in the Third World, pp. 129–38, Boulder, CO: Westview Press. Rosenstein-Rodan, P. (1943) ‘Problems of industrialisation of Eastern and Southeastern Europe’, Economic Journal, June–September. Reprinted in Agarwala, A. N. and S. P. Singh (1963) The Economics of Underdevelopment, New York: Oxford University Press. —— (1961) ‘International aid for underdeveloped countries’, Review of Economics and Statistics, 43: 2. SAARC (1992) Meeting the Challenge: report of the independent South Asian Commission on poverty alleviation, Kathmandu: South Asian Association for Regional Cooperation (SAARC) Secretariat. Sachs, J. (1994) ‘India’s unfinished reform agenda, September 1’, Report prepared for the Indian Council for Research on International Economic Relations, the International Centre for Economic Growth and USAID, New Delhi: ICRIER. Sachs, J. D., Varshney, A. and Bajpai, N. (1999) India in the Era of Economic Reforms, New Delhi: Oxford University Press. Sah, R. K. (1991) ‘Fallibility in human organizations and political systems’, Journal of Economic Perspectives, 5, 2: 67–88. Salvator, D. (1995) International Economics, Englewood Cliffs: Prentice Hall Inc. Sardar, Z. (1992) ‘On serpents, inevitability and the South Asian imagination’, Futures, November: 942–49. SCCI (1995) SAARC Information Handbook, Dhaka: SAARC Chamber of Commerce and Industry. Schafer-Preuss, U. (2008) ‘A Regional Review of the Economics of Climate Change in Southeast Asia’, welcome remarks to the workshop on Knowledge Management and Sustainable Development on 20–21 November, Jakarta: Asian Development Bank, . Schmidt-Hebbel, K., Serven, L. and Solimano, A. (1996) ‘Savings and investment: paradigms, puzzles and policies’, The World Bank Research Observer: 87–117. Schultz, C. (1989) ‘The impossibility of “Involuntary Unemployment” in an overlapping generation model with rational expectations’, Discussion paper 5–89–18, University of Copenhagen, Department of Economics. Schultz, T. W. (1964) Transforming Traditional Agriculture, New Haven: Yale University Press. Schumpeter, J. (1951) The Theory of Economic Development: an inquiry into profits, capital, credit, interest and the business cycle, Cambridge, MA: Harvard University Press. Scitovsky, T. (1985) ‘Economic development in Taiwan and South Korea: 1965–81’, Food Research Institute Studies, XIX, 3: 215–64. Scmidt-Hebbel, K. and Webb, S. B. (1992) ‘Public policy and private saving’, in V. Corbo, S. Fischer and S. B. Webb (eds), Adjustment Lending Revisited: public policies to restore growth, Chicago: University of Chicago Press. Seers, D. (1962) ‘The limitations of the special case’. Reprinted in Meier, G. M. (1984) Leading Issues in Economic Development, 4th edn, New York: Oxford University Press. Selvanathan, E. and Selvanathan, S. (2004) ‘Quality assessment and benchmarking of the new economy’, presented to the international workshop on The New Economy, Knowledge Management and Growth of India and Ireland, Griffith Asia Institute, Griffith University, 5 October. Selvarajah, K. (2000) ‘India’s telecom policy – is it leading to the desired developments?’, Telecommunications Journal of Australia, 50, 1: 67–75.

258

Bibliography

Selznick, P. (1985) ‘Focusing organizational research on regulation’, in R. Noll Regulatory Policy and the Social Sciences, p. 363. Sen, A. (1994) ‘Freedoms and needs’, New Republic, January 31: 10–17. Sen, A. K. (1976) ‘Poverty: an ordinal approach’, Econometrica, 44, 2: 219–31. —— (1990) ‘How is India doing?’, in The Indian Economy and Its Performance since Independence, Delhi: Oxford University Press. Sengenberger, W. (1991) ‘The role of labour market regulation in industrial restructuring’, in G. Standing and V. Tokman (eds), Towards Social Adjustment: Labour Market Issues in Structural Adjustment, Geneva: ILO. Sengupta, J. K. (1991) ‘Rapid growth in NICs in Asia: tests of new growth theory for Korea’, Kyklos, 44, 4. —— (1993) ‘Growth in NICs in Asia: some tests of new growth theory’, Journal of Development Studies, 29, 2: 342–57. Sharma, S. K. and Malhotra, S. L. (1977) Integrated Rural Development: approach, strategy, and perspectives, New Delhi: Abhinav Publications. Shaw, L. (1973) Financial Deepening in Economic Development, New York: OUP. Siddiqi, A. H. B. (1991) Pakistan: its society, resources and development, New York: University Press of America. Singer, H. and Roy, S. (1993) Economic Progress and Prospects in the Third World: lessons of development experience since 1945, Hants: Edward and Elgar. Singh, A. (1994) ‘Growing independently of the world economy: Asian economic development since 1980’ UNCTAD Review pp. 91–106, Geneva: UN. Singh, I. (1990) The Great Ascent: the rural poor in South Asia, Baltimore: Johns Hopkins Press. Singh, M. (1964) India’s Export Trends and Prospects for Self-contained Growth, Oxford: Clarendon Press. ——(ed.) (1993) ‘New economic policy, poverty and self-reliance’, in S. Prasad and J. Prasad (eds), New Economic Policy: reforms and development, New Delhi: Mittal Publications. Singh, N. K. (2007) The Politics of Change: A Ringside View, New Delhi: Penguin Viking. Sinha, R. K. (1985) Economic Development and Social Change in India, New Delhi: Deep and Deep Publications. —— (1986) Dynamics of Economic Development in India: economics of poverty in plenty, New Delhi: Deep and Deep Publications. Smith, F. L. and Jeffreys, K. (1994) ‘A free-market environmental vision’, Market Liberalism, Cato Institute: 389–402. Smith, K. (1993) ‘Air Pollution: assessing total exposure in developing countries’, Environment, 30, 10: 16–35 Smith, K. (1993a) ‘Fuel combustion, air pollution and health: the situation in developing countries’, Annual Review of Energy and the Environment, 18: 529–66. Snodgrass, D. R. (1966) Ceylon: an export economy in transition, Homewood IL: Irwin. Sobhan, R. (1982) The Crisis of External Dependence: the political economy of foreign aid to Bangladesh, Dhaka: University Press Ltd. —— (ed.) (1995) Experiences with Economic Reform: a review of Bangladesh’s development 1995, Dhaka: Centre for Policy Dialogue and University Press Ltd. Sobhan, R. (ed.) (1990) From Aid Dependence to Self-Reliance: development options for Bangladesh, Dhaka: University Press Ltd.

Bibliography

259

—— (1993) Bangladesh: problems of governance, Dhaka: University Press Ltd. Song, B. N. (1994) The Rise of the Korean Economy, Oxford: Oxford University Press. Sood, K. (1989) Trade and Economic Development: India, Pakistan and Bangladesh, New Delhi: Sage Publications. Sorsa, P. (1992) ‘GATT and the environment: basic issues and some developing country concerns’, in P. Low (ed.), International Trade and the Environment, World Bank Discussion Paper No. 159. Southworth, H. and Johnston, B. (1967) Agricultural Development and Economic Growth, Ithaca: Cornell University Press. Sridhar, K. S. and Sridhar, V. (2004) ‘Telecommunications infrastructure and economic growth: evidence from developing countries’, Working Papers 04/14, National Institute of Public Finance and Policy, New Delhi: Government of India. Srinivasan, T. N. and Bardhan, P. (eds) (1988) Rural Poverty in South Asia, New York: Columbia University Press. Srinivasan, T. N. and Canonero, G. (1995) ‘Preferential Trading Arrangements in South Asia: theory, empires and policy’, IED seminar paper presented in May, International Institute for Economic Development, Boston, Boston University. Standing, G. (1992) ‘Do unions impede or accelerate structural adjustment? Industrial vs company unions in an industrialising labour market’, Cambridge Journal of Economics, 16 September: 327–54. Stern, N. (1991) ‘The determinants of growth’, Economic Journal, 101 (June). Stiglitz, J. E. (1989) ‘Markets, market failure, and development’, American Economic Review, May, 79, 2: 197–203. Stiglitz, J. E. and Weiss A. (1992) ‘Asymmetric information in credit markets and its implications for macroeconomics’, Oxford Economic Papers, 44: 694–724. Sto Tomas, P. A. (1995) ‘Client satisfaction as a performance measure in the Philippines Civil Service’, Asian Review of Public Administration, 7, 2: 100–07. Summers, L. (1991) ‘Regionalism and the world trading system’, in Policy Implications of Trade and Currency Zones, symposium sponsored by the Federal Reserve Bank of Kansas City, Wyoming, August: 7–42. Sundararajan, V. (1996) ‘The role of prudential supervision and financial restructuring of banks during transition to indirect instruments of monetary control’, Working Paper WP/96/128, Washington, DC: International Monetary Fund. Sundararajan, V. and Balino, T. J. T. (1991) ‘Issues in recent banking crises’, in Banking Crises: cases and issues, Washington, DC: International Monetary Fund. Sunkel, R. (1969) ‘National development policy and external dependence in Latin America’, Journal of Development Studies, 6, 1. Tallman, E. W. and Wong, P. (1990) ‘Human capital and endogenous growth: evidence from Taiwan’, Working paper 90–9, Federal Reserve Bank of Atlanta. Tan, A. S. (1985) Mass Communication Theories and Research (2nd Edition), New York: Wiley. Tata (1995) Statistical Outline of India 1995–96, Bombay: Department of Economics and Statistics. Taylor, L. (1983) Structuralist Macroeconomics: applicable models for the third world, New York: Basic Books. —— (ed.) (1990) The Rocky Road to Reform: adjustment, income distribution and growth in the developing world, Cambridge, MA: The MIT Press. Tele.net (2001) 2, 8 August, New Delhi. —— (2002) 3, 1 January, New Delhi.

260

Bibliography

Telecom Regulatory Authority of India (TRAI) (1998) Consultation Paper on Framework and Proposals for Telecom Pricing, New Delhi: TRAI. —— (1999) Consultation Paper on Introduction of Competition in Domestic Long Distance Communications, New Delhi: TRAI. —— (2001) Issues relating to interconnection between access providers and national long distance operators, Consultation Paper 2001/5, New Delhi: TRAI. —— (2004) ‘Consultation paper on access deficit review’, 23 June: TRAI. —— (2007a) ‘Draft recommendations on growth of broadband’, 17 September: TRAI. —— (2007b) Internet and Broadband targets set by DoT in Broadband Policy 2004: TRAI. Telecom Regulatory Authority of India Act 1997. No. 24 of 1997, New Delhi: TRAI. Telecom Regulatory Authority of India (Amendment) Ordinance (2000), New Delhi: TRAI. Thanawala, K. (1989) ‘Social economic aspects of India’s development’, International Journal of Social Economics 16, 7: 34–47. Thapa, G. B., Chalmers, J., Taylor, K. W. and Conroy, J. (1992) Banking with the Poor, Brisbane: The Foundation for Development Cooperation. Thavaraj, M. J. K (1960) Performance Budgeting in India, New Delhi: Government of India. Thomas, V., Nash, J. and Associates (1991) Best Practices in Trade Policy Reform, Oxford: Oxford University Press. Thomson, W. R. (1992) South Asia: the challenges and opportunities of the 1990s, Occasional Paper No. 34, San Francisco, CA: International Center for Economic Growth. —— (1993) South Asia: the challenges and opportunities of the 1990s, San Francisco: ICS Press. Thorbecke, E. (1991) ‘Adjustment, growth and income distribution in Indonesia’, World Development, 19, 11: 1595–641. Thurow, L. (1974) ‘Cash versus in-kind transfers’, The American Economic Review, 64, 2: 190–5. Tisdell, C. (1997) ‘The environment and sustainable development’, Asian Pacific Economic Literature, 11, 1: 39–55. Torero, M., Chowdhury, S. and Bedi, S. A. (2002) Telecommunications Infrastructure and Economic Growth: a cross-country analysis; information and communication technology for development and poverty reduction, Baltimore: Johns Hopkins University Press: 21–63. Turner, M. and Hulme, D. (1997) Governance, Administration and Development: making the state work, London: MacMillan. UNCTAD (2001) Freedom of Transit: obligations and implications of Article V of the GATT, August, Geneva: UNCTAD. UNDP (1993) Human Development Report 1993, Oxford: Oxford University Press. —— (1994) Human Development Report 1994, New York: Oxford University Press. —— (1995) Human Development Report 1995, Oxford: Oxford University Press. —— (1996) Human Development Report 1996, United Nations Development Programme, Oxford: Oxford University Press. —— (2004) Human Development Report 2004, . —— (2008) Human Development Report 2007/2008, . UNFPA (2008) State of World Population 2008, Reaching Common Ground, Chapter 5, Poverty, Inequality and Population <www.unfpa.org.> UNIDO (1991) Industry and Development: Global Report 1990, Vienna: United Nations Industrial Development Organization, Oxford: Oxford University Press.

Bibliography

261

—— (1995) Industrial Development: Global Report 1995, United Nations Industrial Development Organization, Oxford: Oxford University Press. Uppal, J. S. (1977) Economic Development in South Asia, New Delhi: Tata McGraw-Hill Publishing Company. USAID (2002) Global Population Profile, Washington, DC: USAID. Varma, A., Souba, J., Sinha, K. C. (1992) ‘Environmental considerations of land transport in developing countries (Parts I and II)’, Transport Review, 12, 2 & 3: 101–13, 187–98. Vasudeva, R. D. (1986) Economic Development: causes and consequences, New Delhi: South Asia Books. Verghese, B. G. (1990) Waters of Hope: integrated water resource development and regional co-operation within the Himalaya-Ganga-Brahmaputra-Barak Basin, New Delhi: Oxford University Press and IBH Publishing House. Vernon, R. (1966) ‘International investment and international trade in the product cycle’, The Quarterly Journal of Economics, 80: 190–201. Vodafone Policy Paper Series (2005) ‘Africa: the impact of mobile phones’, 2, March. Vohra, B. B. (1985) The Greening of India’, in Bandyopadhyay et al. (eds), India’s Environment: crises and responses, Nataraj: Dehradun. Wackernagel, M. et al. (1997) ‘Ecological Footprints of Nations. Rio + 5’, Consultation Report. Wadhva, C. (1987) Regional Economic Cooperation in Asia: Bangladesh, India, Pakistan and Sri Lanka, New Delhi: South Asia Books. Wadhva, C. D. and Asher, M. G. (eds) (undated) ASEAN-South Asia Economic Relations, Singapore: Institute of Southeast Asian Studies. Wanigaratne, M. R. A. C. (1985) Economic Relations between South Asia and ASEAN, Tokyo: Institute of Developing Countries. Waqif, A. A. (ed.) (1991) Regional Co-operation in Industry and Energy: prospects for South Asia, New Delhi: Sage Publications. Warr, P. (1992) ‘Exchange rate policy, petroleum prices, and the balance of payments’, in A. Booth (ed.), The Oil Boom in Asia: Indonesian economic policy and performance in the Soeharto era, Singapore: Oxford University Press. Warr, P. G. and Bhanuprangse, N. (1994) Macroeconomic Policies, Crisis, and Long-Term Growth in Thailand, Washington, DC: World Bank. Watson, A. (1994) ‘China’s economic reforms: growth and cycles’, Asian-Pacific Economic Literature, 8, 1: 48–65. Watson, R. T. (ed.) (2001) Climate Change 2001: Synthesis Report, IPCC, Cambridge: Cambridge University Press. Waverman, L., Meschi, M. and Fuzz, M. (2005) ‘The Impact of Telecoms on Economic Growth in Developing Countries’, in ‘Africa: The Impact of Mobile Phones’, The Vodafone Policy Paper Series, Number 3, 10. Webster, D. (1994) ‘Managing the urban environment in ASEAN: the case for urban regional development strategies’, Regional Development Dialogue, 15, 2: 116–28. Wellenius, B. (1997) ‘Telecommunications reform – How to succeed’, Public Policy Journal, Private Infrastructure, No. 130, The World Bank Group, . White, H. (1992) ‘The macroeconomic impact of development aid: a critical survey’, Journal of Development Studies 28, 2: 163–240. —— (1995) ‘How much aid is used for poverty reductions’, paper presented to IDS Aid and Poverty Reduction Seminar, 8 February, University of Sussex, Brighton.

262

Bibliography

White, H. and Wignaraja, G. (1992) ‘Exchange rates, trade liberalisation and aid: the Sri Lankan experience’, World Development, 20, 10. Wignaraja, P. (1991) Participatory Development: learning from South Asia, Karachi: UN University Press. Wignaraja, P. and Hussain, A. (eds) (1989) The Challenges in South Asia: development, democracy and regional cooperation, New Delhi: Sage Publications. Wilson, G. (1984) ‘Social Regulation and Explanations of Regulatory Failure’, Journal of Political Studies, 32. Wolf, M. (1982) India’s Exports, London: Oxford University Press. Woo, M. (1991) The Politics of Social Welfare Policy in South Korea, Lanham, MD: University Press of America. World Bank (1953) The Economic Development of Ceylon, Baltimore: John Hopkins University. —— (1989) World Development Report 1989, New York: Oxford University Press. —— (1990) World Development Report 1990: poverty, Oxford: Oxford University Press. —— (1991) World Tables 1991, Baltimore: The Johns Hopkins University Press. —— (1991a) World Development Report 1991, Oxford: Oxford University Press. —— (1991b) Assistance Strategies to Reduce Poverty, Washington, DC: The World Bank. —— (1992) World Development Report 1992, New York: Oxford University Press: 1. —— (1992a) Poverty Reduction Handbook, Washington, DC: The World Bank. —— (1993) World Development Report 1993, Investing in Health, Oxford: Oxford University Press. —— (1993a) ‘Regionalism and South Asia’s Trade’, South Asia Division, Washington, DC: World Bank. —— (1993b) The East Asian Miracle: economic growth and public policy, New York: Oxford University Press for the World Bank. —— (1993c) World Bank Policy Research Bulletin, January–February, 4, 1. —— (1993d) Sustaining Rapid Development in East Asia and the Pacific, Washington, DC: World Bank. —— (1994) World Development Report 1994, Infrastructure for Development, Oxford: Oxford University Press. —— (1995) Global Economic Prospects and the Developing Countries 1995, Washington, DC: World Bank. —— (1995a) Sri Lanka: recent economic developments and prospects, April, Washington, DC: World Bank. —— (1995b) Economic Developments in India: achievements and challenges, A World Bank Country Study, Washington, DC: World Bank. —— (1995c) World Development Report 1995: workers in an integrating world, New York: Oxford University Press. —— (1995d) Trends in Developing Economies, Washington, DC: World Bank. —— (1995e) Bangladesh: from stabilization to growth, Washington, DC: World Bank. —— (1995f) Bureaucrats in Business: the economics and politics of government ownership, New York: Oxford University Press. —— (1996) World Development Report 1996: from plan to market, Oxford: Oxford University Press. —— (1996a) Bangladesh: government that works – reforming the public sector, Washington, DC: World Bank. —— (1996b) Poverty Reduction and the World Bank: progress and challenges in the 1990s, Washington, DC: World Bank.

Bibliography

263

—— (1996c) Government That Works: reforming the public sector, Dhaka: World Bank by University Press. —— (1996d) ‘Bangladesh, Annual Economic Update: recent economic developments and medium-term reform agenda’, Dhaka: Country Department 1, South Asia Region, Washington, DC: World Bank. —— (1997) World Development Report 1997: the state in a changing world, Oxford: Oxford University Press. —— (2000) World Development Indicators 2000, Washington, DC: World Bank. —— (2004) World Development Indicators 2004, Oxford: Oxford University Press. —— (2005) World Development Indicators 2005, Oxford: Oxford University Press. —— (2006) Global Monitoring Report: millennium development goals, IBRD, Washington, DC: The World Bank. —— (2007) World Development Indicators 2007, Oxford: Oxford University Press. —— (2008) The impact of climate change on South Asia’s poor, <www.worldbank.org>, accessed on 23 January 2009. —— (2008) World Development Report, Oxford. World Trade Organisation, <www.wto.org>, several articles accessed in 2008. www.indiaeyewitness.com, accessed on 16 January 2009. www.wto.org – WTO Agriculture Negotiations, accessed on 8th February 2009. Yunus, M. (1994) ‘Hunger, Poverty and the World Bank’ Grameen Dialogue 17: 1–3. Zahid, S. N. (1995) (ed.), Financial Sector Development in Asia: country studies, Manila: Asian Development Bank. Zahler, R. (1993) ‘Financial sector Reforms and Liberalization’, in Faruqi, S., Financial Sector Reforms in Asian and Latin American Countries, EDI Seminar Series, Washington, DC: World Bank. Zhan, X. J. (1993) ‘The role of foreign direct investment in market-oriented reforms and economic development: the case of China’, Transnational Corporations, 2, 3: 97–148. Ziring, L. (1994) Bangladesh: from Mujib to Ershad an interpretive study, 2nd edn, Dhaka: University Press Ltd.

Index

3G mobile telephony 205–6 ‘20:20 initiative’ 55–6 accountability 215 Adams, F.G. 66 adaptation to climate change 156, 161 administrative structures 6–7 adult literacy rate 5, 6, 31, 32; female 41 Agarwala, R. 67 age structure of the population 39–40, 77 agriculture 137–45, 150–1; climate change and 154, 159, 161–2; contribution to GDP 24; Doha Round and trade reform 111–13; growth in food grain production 139–40; growth performance 22–4; India 145, 189–90; labour force 40, 41, 78; possibility of a second ‘Green Revolution’ 143–4; production of export crops and allied products 142–3; transformation 140–2; see also rural development Ahmad, Q.K. 106 Airtel 197 airtime rates 199–200 All India Muslim League 18 allocation criteria 56, 57 APEC 219 Asian Development Bank (ADB) 14, 48, 49, 53; regional review of the economics of climate change 157–8 Asian financial crisis 3, 29–30 assassinations, political 17, 18, 20, 21, 221 Association for Southeast Asian Nations (ASEAN) 52, 129 Athukorela, P. 6, 221 Australasia 117–19 Australian Information Industry Association (AIIA) 172 average revenue per user (ARPU) 197

Awami League 19 Ayub Khan, General 19 Azariadies, C. 53 bailouts 29–30 Bajpai, A.B. 180 Balassa, B. 129–30 Bandaranaike, Solomon 20 Bandaranaike, Srimavo 20 Bangladesh 3, 14, 18, 19; climate change 153–5, 165–70; collapse of population programme 43; commodity trade 114; decentralization of local administration 145–50, 212–13; delivery of education 59–60; dirigiste doctrine 10; formation in 1971 10, 19; export crops and allied products 142, 143; FDI 106; infrastructure development 134–5; political context 17, 221; poverty 155, 164, 170, 220; privatization 95; rural development 145–50; trade opportunity analysis 120–2 Bangladesh Rural Advancement Committee (BRAC) 59–60 basic needs 146 Bauer, P.T. 11 Bay of Bengal 152, 166 Bedi, S.A. 193 Behrman, J.R. 52, 98 Bhagwati, J.N. 11, 64, 92, 104, 131 Bharat Sanchar Nigam Ltd (BSNL) 182, 197 Bharathiya Janata Party (BJP)-led coalition government 179, 180 Bhutan 136 Bhutto, B. 16, 19, 221 Bhutto, Z.A. 19 ‘big-bang’ approach to privatization 94 biological technology 139

Index Birdsall, N. 6 Bolivia 60 Booth, A. 52 Brahmaputra Basin 166 Brahmin bureaucrat model 14 British colonial rule, legacy of 6–9 broadband 196, 202, 203 budget deficits 28–9, 89 budgeting 150 bureaucracy see civil service business process outsourcing (BPO) 171, 174 cadres of political parties 216 Calling Party Pays (CPP) regime 181, 197 Cameron, J. 221 capital goods industries 97 carbon dioxide emissions 159, 160; see also climate change carbon markets 156 cereals 139–40, 144; see also food grains Chamie, J. 220 Chibber, P. 221 child labour 73 child mortality rate 35, 37, 81, 82; see also infant mortality rate China 3; coastal belt 133–4, 135, 160, 162; IT industry 176–7; policies and actions for addressing climate change 158–64 Chowdhury, S. 193 civil service 7; good governance 212, 214–16; merit-based recruitment 51 climate change 152–70; Bangladesh 153–5, 165–70; China’s policies and actions for addressing 158–64; growth, poverty and in South Asia 164–6; recent studies 155–7; regional review of the economics of climate change in Southeast Asia 157–8 coastal regions: China 133–4, 135, 160, 162; climate change in Bangladesh 166, 167 colonial rule, legacy of 6–9 commodity trade 113–14 community participation 60 competitiveness 174 computer hardware industry 97 computing science graduates 178 conditionalities 15 Confucianism 50–2 consumption, share of by the poor 80, 81 contraceptive use rates 42–3, 79, 80 convergence 5

265

corporatism 65, 66 cost efficiency 175 cost-recovery schemes 59 critical mass hypothesis 193, 208, 209, 214 Cronin, F.J. 192 currency depreciation/appreciation 85–6 current account 26, 86, 87, 89 cyclones 154, 167 data reliability 6 data services 206 Davis, I. 66 debt, external 27–8, 87–9 debt–service ratio 27–8, 87–8 decentralization of local administration 145–50, 212, 212–13 Delhi 202, 203 delivery mechanisms 56–7, 58–60 delta flood plain 166, 167 demand for mobile telephony 230, 231 demand model for telecommunications services 174–5 demographics 38–44, 75–9; demographic challenges 42–4, 79; demographic conditions and trends 38–9, 75, 76–9; female labour force participation 41–2, 78–9; population distribution 39–41, 77–8 Department of Telecommunications (DoT) (India) 179, 181, 182, 184 dependency ratio 40, 77–8 dependency theory 11 depreciation of currency 85–6 Deyo, F. 64 Dhaka 154 Dillinger, W. 147 dirigiste doctrine 7, 9–16, 210; demise of 12–13; intellectual roots 11–12; rise and decline in South Asia 13–16 distortion index 67 ‘distortionist’ view 62–3, 63–4, 66 district councils 147, 148, 149, 213 Doha Round 111–13 donor agencies: funds 58; policy reform agenda 14–15 Drazen, A. 53 droughts 167–8 Drysdale, P. 219 Dunning, J. 100–1 Dutt, A.K. 221 earth’s surface temperature rise 159, 167, 168, 169

266

Index

East Asia 66, 133, 134; Japanese FDI 133, 134; soliciting FDI from 103–4; trade with 117–19 ‘East Asian miracle’ 3 ecological footprint 168–70 econometric model of impact of mobile telephony on economic growth 206–8, 229–32 economic growth 22–30; climate change, poverty and 164–6; domestic savings and investment 24–5; export growth and expansion 25–6; growth performance 22–4; impact of mobile telephony on 196–8, 206–8, 213–14, 229–32; impact of telecommunications 191–5; indebtedness 27–8; indicators of macroeconomic balance 28–30; integration with the global economy 26–7 economic integration: defining 129–30; global 26–7, 109–13; regional see regional integration economic reforms 91–108, 211; FDI 98–108, 108; industrial performance 96–7; infrastructure bottlenecks 97; privatization 94–6, 108; telecommunications in India 178–80; trade liberalization 91–4, 108 ecosystems 159, 162 education: development performance 31, 32, 33, 34; primary education completion rates 31, 32, 35, 36–7, 81; returns to 57; school enrolment rates 6; screening hypothesis 49; share of GDP 55; vocational school fallacy 56, 57–8; see also human resources endogenous growth theories 48 energy conservation measures 160, 161 engineering graduates 178 Enos, J. 102 environmental protection 211 Ershad, H.M. 72 European Union (EU) 117–19 exchange rate 28–9; policy 29, 84–6 exit/voice model 65 export-driven industrialization 91–4, 108 export pessimism 11–12, 98 export subsidies 112–13 exports 86, 87; agricultural export crops and allied products 142–3; Bangladesh 120–3; destinations 120, 121, 123, 125, 126, 127–9; growth in 25–6, 115–16; India 123, 124; Pakistan 125, 126; products 120–2, 123, 124, 125,

126, 128, 129; Sri Lanka 127–9 external actors 14–15 external debt 27–8, 87–9 external sector 86–9 factor endowments 99, 101 famines 9 Fay, M. 147 Fei, J. 137–8 female labour force participation 41–2, 78–9 fertility rates 31, 32, 79, 80 fertilizer technology 138, 143–4 field-level population workers 43 Fields, G. 13 financial management 150 financial market interventions 9, 12–13 financial repression 13 financing human development 56, 58–60 firm-specific advantages (FSAs) 100–1 fiscal balance 28–9, 89 fiscal conservatism 7 fiscal crisis 15–16 fiscal restructuring 59 Fishlow, A. 15 fixed line telephony 193, 194, 195–6, 202; prices 207; see also telecommunications flying geese model 99–100, 104 food grains 139–42, 143–4, 150–1; deficits to surpluses 140–2; demand and supply trends and projection for India 145; downward trend in production 144; growth in production 139–40; see also agriculture food processing sector 96–7 food self-sufficiency 141, 142–3 foreign direct investment (FDI) 26, 27, 98–108, 108; coastal regions 134–5; developing an appropriate policy framework 101–3; global overview 98–9; ‘look east’ policy as component of FDI policy 103–4; recent developments and policy initiatives 104–8; theoretical perspectives 99–101 foreign reserves 26, 27 forests 159, 162 Foster, P.J. 58 free trade area (FTA) 130–1, 132, 136 Freeman, R.B. 66, 71 freshwater resources 156–7 game theory 65–6 Gandhi, I. 18

Index Gandhi, R. 18, 20 Ganges Basin 166 Garnaut, R. 219 GDP: growth 22–4, 83–4, 110; per capita 4, 5–6, 189; per capita and telecommunications 191–2, 201, 202; sectoral shares 24 gender discrimination 73 gender equality 35, 36–7, 81 General Agreement on Tariffs and Trade (GATT) 111 general ITES 171 geographical proximity 218 Gini ratio 35 global economy, integration with 26–7, 109–13 global financial crisis 21, 29–30, 109 global warming see climate change ‘go-slow and institutional’ approach to privatization 94 good governance see governance Gore, A. 152 governance 11, 210–22; achieving MDGs and population control for growth 212, 219–20; decentralization 212, 212–13; good governance in the era of information revolution 220–2; mechanisms for facilitating good governance 211–20; principles of good governance 211; private investment-led information revolution 213–14; role of the bureaucracy 212, 214–16; trade liberalization and non-discriminatory regionalism 212, 217–19; transferring non-core functions to the private sector 212, 216–17 graduates 178 Greater East Asia Co-Prosperity Sphere (GEACS) 104 ‘Green Revolution’ 139, 150; possibility of a second ‘Green Revolution’ 143–4 Grimsson, President 153 Grossman, G.M. 48 Gupta, D. 204 Haq, M. 218 Hardy, A. 191–2 Haryana 202, 203 Hasina, Sheikh 17, 147 health: child mortality rate 35, 37, 81, 82; development performance 31, 32, 33; infant mortality rate 31, 32; life expectancy 5, 31, 32, 54–5; maternal 35, 37, 81, 82; share of GDP 55

267

health and safety standards 72–3 Helpman, E. 48 high penetration states 230–2 high-yield seed technology 138, 143–4 Himalaya council 153 Hollands, M. 172 Hong Kong 3 Hossain, M.M. 171, 212 Hossain, M.S. 153, 154 human capital theory 48–9 human development 31–7; education 31, 32, 33, 34; health 31, 32, 33; vs human resource development 49–50; indicators 4, 5, 31–2; MDGs 35–7; poverty and income distribution 34–5 human development compact 55–6 human resources 47–61; allocation criteria and vocational school fallacy 56, 57–8; cross-country evidence of role in economic development 52–5; financing and delivery mechanisms 56, 58–60; human capital theory and new growth theories 48–9; human development vs human resource development 49–50; policy lessons 55–60; socio-cultural determinants of human capital formation 50–2 ideas 9–16 ideology 9–16 import-substituting industrialization (ISI) 9, 11, 12 imports 25, 26, 86, 87, 115 incentives to attract FDI 101–3 income distribution 35 income inequality 54–5 income per capita 54–5 indebtedness, external 27–8, 87–9 India 3, 5, 14, 189–209; climate change 165; commodity trade 114; competitive edge in IT 176–7; development plan of 1952 12; economic and regulatory reform in telecommunications 178–86; export crops and allied products 142, 143; failure of fertility control policies 43; FDI 105–6, 106–7; food grain demand and supply trends, and projection 145; impact of mobile telephony on economic growth 206–8, 213–14, 229–32; industrialization 7–8; knowledge superpower 177–8; mobile phone operators 197, 199, 235; most preferred destination for IT 172–3; National Telecom Policy 1994 178–9,

268

Index

India (cont.): 180–1, 183–4, 190, 197; New Telecom Policy 1999 180–2, 183–5; Partition 8, 18; policy recommendations for telecommunications 208; political context 17–18, 221; poverty 18, 164, 170, 220; private investment-led information revolution 213–14; privatization 95–6; reasons for current IT boom 189–91; rise of the middle class 178; state boundaries and mobile licences 233–4; support for Bangladesh 10; and Tamil separatism in Sri Lanka 20; telecommunications across states 195–206; three presidencies of British India 132, 133; trade opportunity analysis 122–5 Indian Congress Party 18 Indian Planning Commission 12 Indonesia 3 industrialization 7–8; export-driven 91–4, 108; import-substituting 9, 11, 12; inward-oriented 217–18 industry: contribution to GDP 24; growth performance 22–4; performance 96–7 infant mortality rate 31, 32; see also child mortality rate inflation 28–9, 83–4 information revolution: good governance in the era of 220–2; private investmentled 213–14 information technology (IT) 171–86; India 176–8, 189–91; most preferred destination 172–6; offshore outsourcing vs outsourcing destination 171–2; see also telecommunications infrastructure 211; bottlenecks 97; development 106–7, 134–5; India 189, 190; telecommunications in India 203, 204, 205–6 initial conditions 4–9 ‘institutionalist’ view 62–3, 64–6 integrated rural development (IRD) 146 integration, economic see economic integration Intergovernmental Panel on Climate Change (IPCC) 152, 163; sixth technical paper 156–7 internalization advantages 100–1 international co-operation on climate change 156, 163, 164 International Labour Organization (ILO) 62–3; ratification of ILO conventions 68

International Monetary Fund (IMF) 15, 30, 91, 94 internet 33, 34, 196, 202, 203, 206; kiosks 205 inter-regional trade 117–19 interventionist FDI policy 101–3 intra-regional trade 116–17, 218 investment 24–5, 54–5; private investment-led information revolution 213–14 investor-friendly packages 101–3 inward-oriented industrialization 217–18 Iqbal, M. 18 Ireland 172–3 irrigation technology 138, 143–4 IT-enabled services (ITES) 171, 174 Jamuna bridge 134 Japan 100; colonial rule 8, 9; source of FDI 104, 133, 134 Jayasuriya, S. 6, 221 Jayewardene, J.R. 20 Jensen, R. 194 Jinnah, M.A. 18 job security regulations 63 Kashmir 221 Kathuria, R. 171 Kenya 60 Kerala 202, 203 Kim, K.K. 221 knowledge superpower 177–8 Kohli, A. 221 Korea, South 3, 4–6; Economic Planning Board 12; industrialization 8; labour markets 69; recovery from recession 30 ‘Korean model’ 98 Korean War 8 Krueger, A. 11, 15, 91–2, 214 Kumaranatunga, C.B. 20 Kyoto Protocol 158, 163 labour force participation rates 40, 41, 78; female 41–2, 78–9 labour market institutions 62–74; ‘distortionist’ view 62–3, 63–4, 66; ‘institutionalist’ view 62–3, 64–6; and policies 66–73 labour market interventions 9, 13 labour standards 72–3 labour subordination hypothesis 64 Lal, D. 15, 214 land use 39, 76–7 Latin America 66

Index law, foundation of 211 Lewis, W.A. 5, 137 Liaquat Ali Khan 18 life expectancy 5, 31, 32, 54–5 line ministries 214 Little, I. 7, 12 livestock breeding 159, 162 local administration, decentralization of 145–50, 212, 212–13 Local Government Reform Commission 146 location-specific advantages 100–1 ‘Look East’ policy 103–4 low penetration states 230–2 Lucas, R.E., Jr 48 MacNamara, R. 146 macroeconomic management 7, 83–90, 211; in the context of trade dependence and external debt 89; exchange rate policy 84–6; external sector 86–9; indicators of macroeconomic balance 28–30; money supply, inflation and output growth 83–4 Mahalanobis, P.C. 12 Mahanagar Telephone Nigam Ltd (MTNL) 182, 184, 197 Mahathir Mohammad 30 Malaysia 3, 30 manufactured products 93 manufacturing value added (MVA) 96–7 market access 112 market failure 11–12, 65 market power 173 ‘marketization’ approach to privatization 94 Mascarenhas, A. 221 maternal mortality ratio 35, 37, 81, 82 mechanical technology 139 Meghna Basin 166 merchandise trade 27, 115–16; Bangladesh 122; India 124, 125; Pakistan 125, 127; Sri Lanka 129 merit-based recruitment 51 Metcalf, D. 58 Metcalfe, I. 167 micro pre-paid telephony 197, 198 middle class 178 Middle East 117–19 military coups 17, 18–19, 21 Millennium Development Goals (MDGs) 35–7, 75–82, 156; achievements 2000–2005 79–81, 82; demographic conditions and trends 75, 76–9; good governance 212, 219–20

269

Mingat, A. 58 minimum wage legislation 63 mobile telephony 181, 184, 191–209, 213–14; across Indian states 195–206; coverage rates 199, 200; econometric model of impact on growth 206–8, 229–32; impact on economic growth 196–8, 206–8, 213–14, 229–32; penetration rates 199; policy recommendations 208; service providers 197, 199, 235; state boundaries and mobile licences 233–4 money supply 83–4 monsoons 167, 169 most preferred destination (MPD) 172–6; conceptual framework 174; cost efficiency 175; measuring productivity 176; measurement of 173–4; methodology 174; Ramsey pricing 174–5 Mumbai 202, 203, 221 Musharraf, General P. 19 Muslim League 19 Naidu, C. 180 National Bureau of Economic Research (NBER) (US) 14 National Coordination Committee on Climate Change (NCCCC) (China) 163 National Development and Reform Commission (NDRC) (China) 163 National eGovernance Programme (NeGP) (India) 205 National Leading Group to Address Climate Change (China) 163 Nehru, J. 18 Nepal 136 network effects 192, 193, 207–8, 230–2 New, M. 153 new growth theories 48–9 New Scientist 177–8 Newaz Sharif 19 Newly Industrialized Economies (NIEs) 53–4 nominal tariffs 93 non-core functions, transferring to private sector 212, 216–17 non-governmental organizations (NGOs) 59, 146, 151 North America 117–19 Norton, S.W. 192 Official Development Assistance (ODA) 88–9, 105

270

Index

offshore outsourcing 171–2 OFTEL 173 O’Malley, W. 50 open regionalism 131, 219 Organization for Economic Co-operation and Development (OECD) 14 Otani, I. 53 output see GDP outsourcing destination 171–2; MPD 172–6 ownership advantages 100–1 Pakistan 3, 14, 164, 220; climate change 165; commodity trade 115; export crops and allied products 142, 143; FDI 106, 107–8; political context 18–19, 221; population control 43–4; privatization 95, 96; trade opportunity analysis 125–7 Pakistan Academy for Rural Development 145 Pakistan People’s Party 19 patronage regimes 67 Pencavel, J. 65, 67–8 Philippines 52, 215 planning 9, 11, 12 policy 220; China’s approach to climate change 161–4; FDI policy 101–8; human resources 55–60; ideas, ideology and evolution of South Asian economies 9–16; labour market institutions and 66–73; recommendations for telecommunications in India 208; role of the state in maintaining a nondistortionary policy environment 211; standard prescriptions for reform 210 political assassinations 17, 18, 20, 21, 221 political context 16–21, 221 political economy 66 political parties 18, 19; cadres of 216 politicization of trade unions 72 population 38, 75–9; control 43–4, 79, 212, 219–20; density 39, 76–7, 79; distribution 39–41, 77–8; growth 38–9, 43, 75, 76, 220 post-Confucianism 50–2 post-independence era 3–21; 1950s and 1960s 4–6; dirigiste doctrine 7, 9–16, 210; legacy of British colonial rule 6–9; political history 16–21 poverty 21; Bangladesh 155, 164, 170, 220; changes in 34–5; climate change and 164–6; India 18, 164, 170, 220;

reduction as MDG 35, 36, 37, 80–1, 81–2, 219–20 Power, J.H. 12 Prebisch, R. 12 Premadasa, R. 20 prices: mobile telephony 196–7; Ramsey pricing 174–5 primary education completion rates 31, 32; MDG 35, 36–7, 81 primary products 93 private sector: collaboration with public sector 59–60; telecommunications in India 179, 183–4, 197, 213–14; transferring non-core functions to 212, 216–17 privatization 94–6, 108; and FDI 99; and governance 212, 216–17; trends 95–6 producer support 112–13 product cycle theory 99–100 product market imperfections 70–1 productivity: agricultural 140; measurement and MPD 176 Psacharopoulos, G. 57 public awareness 162–3 public sector–private sector collaboration 59–60 public service 216 Public Switched Telephone Network (PSTN) infrastructure 203 Punjab 202, 203 quantitative restrictions (QRs) 93–4 Quibria, G. 34 Rahman, Sheikh Mujibur 17, 19 Ramsey pricing 174–5 Ranis, G. 137–8 reform cycles 16 regional integration 129–36; good governance 212, 217–19 regional trade 115–19; inter-regional 117–19; intra-regional 116–17, 218 regulation 9; FDI policy 101–3, 106, 107; labour market 62–74; telecommunications in India 180–5, 186 reliability of data 6 Reliance Infocom 178, 197 religion 16 remittances 114, 115 rice 139, 154 riverbank erosion 154 road transit facilities 134–6 Röller, L.H. 192–3

Index Romer, P. 48, 53 rural development 151; Bangladesh 145–50 rural teledensity 203–5 Sachs, J. 216 safe drinking water 32, 33 salinity 154 saving ratio 5 savings 24–5, 83 school enrolment rates 6 Schultz, T.W. 138 Schumpeter, J. 137 science graduates 178 Scitovsky, T. 12 Scott, M. 12 screening hypothesis 49 sea level rise 154, 166, 167, 169 sectoral growth rates 22–4 sectoral shares of GDP 24 Seed Project (China) 162 Selvarajah, K. 180, 183 Sen, A.K. 17–18 Senanayake, D.S. 20 Senanayake, Dadley 20 Sengenberger, W. 65 Sengupta, J.K. 53–4 services: contribution to GDP 24; growth performance 22–4 services trade 27, 114–15; Bangladesh 122; India 124, 125; Pakistan 125, 127; Sri Lanka 129 Shundor Bon 166 significant market power (SMP) approach 173 Singapore 3 ‘Singapore model’ 98 Singh, M. 18 Smith, A. 211 social services 211 socio-cultural approach to human capital formation 50–2 Song, J.S.-H. 214 South Asian Association for Regional Cooperation (SAARC) 130–6, 218, 219 South Asian Free Trade Area (SAFTA) 130–1, 132, 136 South Asian Preferential Trade Agreements (SAPTA) 130, 132–3, 218–19 Southeast Asia: comparative analysis of demographic dynamics 38–44; comparative analysis of economic growth 22–30; comparative analysis of human development 31–7

271

Soviet Union 10 specialized ITES 171 speed of integration 110–11 Sri Lanka 3, 6, 14, 164, 220; commodity trade 115; export crops and allied products 142–3; FDI 105; labour market 67; political context 20, 221; population control 44; privatization 95; trade opportunity analysis 127–9 Srinivasan, T.N. 131 Standing, G. 64–5, 71–2 state: core functions 211; transferring non-core functions to private sector 212, 216–17 state-owned enterprises (SOEs) 9, 10, 216–17 Stern, N. 49, 152 Stern Report 152–3 strategic ministries 214 structural adjustment programmes (SAP) 15, 66, 68, 91, 94 sub-district councils 147, 148–50, 213 sub-regional groups 132–3, 133–6 subsidies: agricultural 112–13; to SOEs 216–17 surplus labour model of growth 137–8 Taiwan 3; labour markets 69 Taliban 19, 44, 221 Tallman, E.W. 54 Tamil Nadu 202, 203 Tamil separatism 20, 221 Tan, A.S. 58 tariff rates 8, 13, 92–3 technology, agricultural 138–9, 142; possibility of a second ‘Green Revolution’ 143–4 technology transfer 102–3 Telecom Dispute Settlement and Appellate Tribunal (TDSAT) (India) 182 Telecom Regulatory Authority of India (TRAI) 180–2, 182–3, 186, 196 Telecom Regulatory Authority of India Act (TRAI Act) 1997 181 telecommunications 189–209; across states in India 195–206; economic and regulatory reform in India 178–86; impact on economic growth 191–5, 213–14; mobile telephony see mobile telephony; policy recommendations 208; private investment-led information revolution 213–14 temperature increase 159, 167, 168, 169

272

Index

Termination of Employment Workmen Act (TEWA) (Sri Lanka) 67 terrorism 16, 221 textile industry 97 Thailand 3, 52 Thomson, W.R. 218 threshold of telecom density 193, 208, 209, 214 Torero, M. 193 trade 26–7, 109–36; between regions 117–19; composition and magnitude 113–15; Doha Round 111–13; growth 115–16; integration trends 110; intraregional 116–17, 218; prospects of regional integration 129–32; SAARC 130–6, 218, 219; SAPTA 130, 132–3, 218–19; trade opportunity analysis by country 120–9; see also exports, imports trade balance 86–7; Bangladesh 120; India 122; Pakistan 125; Sri Lanka 127 trade creation 219 trade diversion 219 trade liberalization 13, 91–4, 108, 131–2; good governance 212, 217–19 trade theory, and FDI 99 trade unions 63, 65, 71–2; control/suppression 71; union densities 69 TRAI (Amendment) Act 2000 181, 182–3 transit facilities 134–6 translog cost function 175 transnational corporations (TNCs) 98; see also foreign direct investment (FDI) transparency 215 union councils 147, 148, 149 union densities 69 United Nations Conference on Trade and Development (UNCTAD) 136 United Nations Development Programme (UNDP) 31, 49–50, 54–5, 104–5; human development compact 55–6; Human Development Report 2007/2008 155

United Nations Framework Convention on Climate Change (UNFCCC) 158, 163 United States (US): convergence to US living standards 5; USAID 14, 43–4 Universal Access Service Licence (UASL) 197 universal service 183, 184 Universal Service Obligation Funds (USOF) 205, 206 Universal Service Obligations (USO) guidelines 184 upazila parishads (sub-district councils) 147, 148–50, 213 urban teledensity 203–5 Uruguay Round 111 Videsh Sanchar Nigam Ltd (VSNL) 182 Villaneuva, D. 53 vocational school fallacy 56, 57–8 Vodafone 197 voice/exit model 65 vulnerable, protecting the 211 Wackernagel, M. 168 wages: behaviour of real wages 70; minimum wage legislation 63; union wage differentials 69 water: freshwater resources 156–7; impact of climate change in China 159–60, 162; safe drinking water 32, 33 Waverman, L. 192–3, 193–4 World Bank 14–15, 62–3, 72, 91, 94, 130, 211; impact of climate change on South Asia’s poor 164–5 World Development Report 212 World Trade Organization (WTO) 111, 219; Doha Round 111–13 Yahya Khan, General 19 Zardari, A.A. 19 Zhan, X.J. 102 Zia-ul-Haq, General 19 zila parishads (district councils) 147, 148, 149, 213