04 - South Asian Economic Blues

EditorImtiaz Alam

Executive EditorS. Akbar Zaidi

Assistant EditorMs. Zebunnisa Burki

Consulting Editors

BangladeshEnayetullah Khan

IndiaK. K. Katyal

NepalMs. Bandana Rana

PakistanI. A. Rehman

Sri LankaMs. Sharmini Boyle

Publisher Free Media Foundation

FacilitatorSouth Asian Free Media

Association (SAFMA)

Designed byDESIGN 8

PrinterQaumi Press

Editor’s PostE-mail:

[email protected]

Address09-Lower Ground,

Eden Heights, Jail Road, Lahore, Pakistan.

Tel: 92-42-5879251; 5879253 Fax: 92-42-5879254

Website :www.southasianmedia.net

Informal and Free Trade ArrangementsNisha Taneja

Women and Development in South AsiaDr Preet Rustagi

India-Pakistan TradeS. Akbar Zaidi

India: State of the EconomyDr Rajesh Mehta

Pakistan: Performance and ProspectsA. R. Kemal

iSouth Asian Economic Blues

In This Issue

SAFTA : A CritiqueDr Saman Kelegama

Pakistan, India and Regional CooperationShahid Javed Burki

Aid, Governance and OwnershipProfessor Rehman Sobhan

Contents

iii

9

19

48

Sri Lanka: Peace and Economic ReformsDushni Werakoon

132

57

71

84

92

104

Neo-liberal ReformsJayati Ghosh

35

Bangladesh: An Alternative ParadigmDr Q. K. Ahmed

Nepal: Low Equilibrium TrapDr Gunanidhi Sharma

119

141

Caste Politics in IndiaAditya Nigam

148

JOURNALS O U T H A S I A N

countries. The successes of growth have not translated into overall and equitable

development for all people of the region. In Pakistan, for example, the reforms have

led to the rise in poverty levels, while analysts feel that in the case of India, growth has

taken place without the creation of jobs. In Bangladesh, there are fears that the recent

boom will collapse in a quota-free world for textiles, Bangladesh's main export. Apart

from India, the other countries have a narrow base for exports and for manufacturing,

which may limit future benefits.

In order to address the specific issues which address these countries collectively, the

idea of regional cooperation in the form of a free trade agreement, perhaps leading to

an eventual economic union, have been floated. Regional blocs have been one form to

effectively limit the damage caused by globalisation. However, trade and economic

relations in South Asia are constrained by the problems that exist between India and

Pakistan, because of which South Asia cannot move ahead. Both India and Pakistan

are holding back progress in the region and need to sort out their numerous problems.

While there is a great deal of logic and benefit in the South Asian countries forming a

trading bloc, unless contentious issues between countries are resolved, South Asia will

not emerge as an economic powerhouse. With 300 million of its inhabitants in

poverty- sixty per cent of the world's total- peace and regional cooperation will have to

go hand in hand. Without this, South Asia's desire to be part of the Asian Century, will

remain a mere pipedream.

ii


The South Asian Century

Many people believe that the 21st Century will be Asia's Century. With China already

showing huge promise to lead Asia towards development, towing East Asia along and

outpacing Japan, the other regions in Asia are of particular interest. Central Asia and

West Asia from Iran to the Levant, while having huge potential and large reserves of

oil, still have a way to go before they show trends that suggest that they are headed for

high levels of growth. On the other hand, the region of South Asia comprising seven

large and very small nations is already being called the next East Asia, and India, the

next China.

There are some analysts who suggest that by the year 2050, China and India will be

amongst the leading economies of the world, equalling, if not surpassing, the U.S.,

Europe and Japan. Within South Asia, India's already dominating presence is likely to

grow even larger; by being the only country which shares borders with all the other

countries of South Asia, and being the only neighbour to all the other six, with 75 per

cent of South Asia's land mass, and of its population and economy, India looms large

over the region. The progress and future of the 1.4 billion people of South Asia will

depend on the political economy of the region and where India takes it, and how the

other smaller countries can benefit from this dynamism. However, there are genuine

fears that the smaller South Asian countries will be swamped by India and all things

Indian; clearly there is a need, especially by India, to allay such fears and to take

unilateral measures- such as allowing zero-tariff imports from other South Asian

countries- which account for greater trust and mutual cooperation.

All the countries of South Asia, especially the larger four, have been undergoing

economic reforms for more than a decade. The results and outcomes of these reforms

have been mixed, and depend a great deal on internal and domestic conditions. For

example, India being the most stable of the lot and perhaps having the best initial

conditions, has led the way with growth rates exceeding 6 per cent per annum for over

a decade, and with growth projected to rise to even higher levels. Pakistan,

Bangladesh, Sri Lanka and Nepal, have had to deal with domestic political strife,

changes in government and instability, and have shown growth trends which are less

impressive. However, whenever stability and peace has emerged- as the case of Sri

Lanka and Pakistan shows- there has been some growth. As a region, however, South

Asia has shown promising trends and in most countries, per capita income levels have

increased significantly over the last decade.

Yet, there has also been an increase in income and regional inequalities within

i

JOURNALS O U T H A S I A NJOURNALS O U T H A S I A N

Jayati Ghosh, professor of Economics at Jawaharlal Nehru University, New Delhi,

presents a somewhat critical view, different from the conventional wisdom,

regarding the successes achieved in South Asia as a consequence of neo-liberal

reforms. While South Asian economies, including India's, have been stable in

recent years and not exposed to the sort of crisis that took place in East Asia, her

contention is that this picture of improved performance is illusory. She argues

that there has been increasing income inequality in all the countries of the region,

which is reflected in inequalities between regions, classes, and urban and rural

areas. Similarly, she shows that employment generation has slowed down and, at

the same time, poverty has either increased or stagnated. Along with this, there

has been a decline in manufacturing and casual and part-time work has increased

at the cost of organised labour. She examines the nature of structural adjustment

and liberal policies and shows their impact on these economies. She also shows

why neo-liberal policies are in place. By demonstrating that there are a large

number of beneficiaries of such policies and globalisation, she explains how these

political groups have been able to capture power and enforce these policies,

resulting in prosperity for some and impoverishment for others.

Nisha Taneja, Fellow at the Indian Council for Research on International

Economic Relations (ICRIER), New Delhi, looks at informal, rather than formal,

trade in South Asia. While recognising that it is not easy to quantify illicit and

informal trade, her estimates show that this is usually official trade. She presents

cases of trade between different sets of countries in South Asia explaining why

this trade takes place and discusses the nature of this trade. Trade policy

distortions, such as high tariffs, encourage informal trade in South Asia, as do

non-tariff barriers. There are also institutional factors which favour such trade

and include ethnic ties, informal money and exchange markets allowing trade to

proceed unhindered by foreign exchange regulations. There is also the issue of

complicity of many vested interests who benefit from informal trade. She argues

that SAFTA and other bilateral trading agreements will lead to a reduction of

informal trade, although it will not be totally eliminated.

Shahid Javed Burki, a former World Bank Vice-President, argues as to why there

should be greater cooperation and trade between countries in South Asia,

particularly between India and Pakistan. His main argument is that full and

unconstrained resumption of trade on the basis of MFN (most favoured nation)

status granted by both Pakistan and India to each other, holds a lot of promise for

the people of South Asia. With empirical evidence on why there should be

In This Issue (The views expressed in this journal are solely those of the authors)

Dr Saman Kelegama, Executive Director of the Institute of Policy Studies of Sri

Lanka, unlike many enthusiasts of the South Asian Free Trade Area (SAFTA)

agreement signed in Islamabad earlier this year, presents a thorough critique

showing what is wrong with this agreement. He traces the history of trade

agreements in SAARC and shows how it has been very slow at developing any

substantive agreement, except SAPTA, although this covered a limited number of

commodities. SAFTA has come at a time when the trading environment in South

Asia has seen the emergence of a number of parallel regional and pan-regional

initiatives involving most South Asian countries. He is very critical of the fact that

the Group of Eminent Persons (GEP) Report was not sufficiently considered

when drawing up SAFTA. He examines many clauses in both the GEP Report as

well as in SAFTA to show the weaknesses in the latter. He concludes by saying

that, under the circumstances, one should not expect much from SAFTA.

Professor Rehman Sobhan, Chairman of the Centre for Policy Dialogue (CPD),

Bangladesh, presents a well-argued paper which looks at aid, donors and

governance- all in the context of political economy where there is unequal

manifestation and use of power between donors and aid recipients. He presents a

historical account of how aid allocation has changed over the decades, as donor

perspectives have altered under the influence of worldwide market reforms.

'Good governance' has been made a prerequisite by donors for aid recipients.

While countries in South Asia have moved towards open-market economies, he

questions the claims made by the proponents of liberalisation who argue that

there have been tremendous benefits to reforming countries. Sound economic

management (a pseudonym for good governance) has been said to be essential for

quality growth, but he argues that this is very difficult to measure, observe and

quantify. Prof. Sobhan argues that the conceptual link between governance and

economic performance is quite unclear. He also shows how donors exercise a

considerable degree of political influence on some of the countries of South Asia

and uncovers the duplicity of donors who have never shied away from supporting

military regimes. He concludes by saying that the South Asian countries should

be left to design their own policy agendas and articulate their own needs for aid.

SAFTA: A Critique

Aid, Governance and Ownership

Informal and Free Trade Arrangements

Pakistan, India and Regional Cooperation

Neo-liberal Reforms

iii iv


Dr Rajesh Mehta, Senior Fellow at the Research and Information System for

Non-Aligned and other Developing Countries (RIS) in New Delhi, looks at the

reform process in India which has led to phenomenal growth rates all through the

1990s. Since India's was one of the most closed economies in South Asia, the

extent of liberalisation that has taken place has been quite extensive. India's

growth rate has increased to above 7 per cent per annum, and on average was 6

per cent for the decade of 1990s. While many analysts think that India has been

'shining' for most of the the 1990s, it is a little known fact that India had already

started showing high growth rates in the 1980s as well (the 1980-90 average was

6.8 per cent). Mr. Mehta shows that most of India's social and economic

indicators have improved considerably over the last two decades and poverty

levels have fallen from 55 per cent in 1973 to around 26 per cent at present. India

continues to set high growth targets of around 8 per cent for the Tenth Plan

Period 2002-07, but requires additional reforms in the fiscal and trade sectors to

sustain current growth rate.

A.R. Kemal, Director of the Pakistan Institute of Development Economics

(PIDE), Islamabad, presents a large degree of data highlighting the consequences

of Pakistan following through reforms that have taken place since the end of the

1980s. He presents a sector-wise analysis looking at the nature of the reforms

undertaken and the consequences for each sector as a result of the reforms.

Despite numerous interventions in the fiscal and monetary sector, such as

increased taxation, changes in the structure of taxes, etc., he shows that total

revenues have not increased appreciably since 1987 and that the tax

revenue/GDP ratio has not moved from 13.8 per cent as it stood in 1987. In terms

of trade, he shows that the degree of openness of Pakistan's economy measured

by its trade exposure has increased from around 28.3 per cent of GDP in 1987 to

32.4 per cent now. His paper has details about Pakistan's debt profile, rates of

investment, trends in savings, foreign investment, employment generation,

poverty, and a host of other indicators. He concludes his paper by arguing that if

investment were to take place, there might be hope for better living standards for

most Pakistanis.

Dr Qazi Kholiquzzaman Ahmad, Chairman of the research organisation

Bangladesh Unnayan Parishad (BUP), looks at Bangladesh's economic

achievements and failures over the last decade with the initiation of economic

reforms. He shows that Bangladesh's growth rate has increased in recent years,

although it is still around 5 per cent at present. An important reason for the

stagnation of the growth rate is a lack of increase in investment which has been

India: State of the Economy

Pakistan: Performance and Prospects

Bangladesh: An Alternative Paradigm

vi


regional trade agreements, he shows how such agreements allow for greater

economies of scale and better use of resources. He cites one study to establish

that the free exchange of goods and commodities between India and Pakistan

would have resulted in a nine-fold increase in the flow of trade between them

over a five to ten year period. Identifying the areas where trade between the two

countries would be most beneficial, he suggests that the building of trade ties

between the two countries, rather than first solving the Kashmir problem, should

be at the centre of the evolving détente.

Dr Preet Rustagi, Junior Fellow at the Centre for Women's Development Studies

in India, writes about the status and situation of women in the countries of South

Asia, warning us about the problems that exist in making such comparisons in a

very diverse environment. She uses a number of important social and economic

indicators which highlight the position of women in these societies. Women's

work, for example, is explored despite the fact that their contribution is not

properly recognised or enumerated in government statistics. Nevertheless, even

the limited formal contribution to the economy by women shows that there is

increasing involvement in economic participation across the region. The majority

of women work in agriculture and in the urban informal sector. Looking at health

and education indicators, she shows how cultural biases and discriminatory

practices act as a constraint for women to access such services. Although there

has been some improvement in women's status, including political participation,

gender discrimination is still pervasive in South Asia.

S. Akbar Zaidi, a Karachi-based independent social scientist, argues that there are

large trade-related advantages to governments and consumers in both India and

Pakistan if they start trading, and many positive externalities are likely to emerge

as a result. The most important argument made in this paper is that given

Pakistan's state of the economy, especially compared to India's, it is in Pakistan's

interest more than it is India's, to have normal trade relations with each other. He

shows that, despite an unfavourable trade, economic and political environment,

there is already substantial trade between Pakistan and India which has even

greater economic possibilities. Surprisingly, India emerges as Pakistan's 16th

biggest trading partner in terms of imports and Pakistan imports more from

India than it does from France, Canada, Switzerland, the Netherlands, Turkey,

Iran or even Thailand. He argues that there is no economic rationale for either

country not to trade with each other, and that trade between the two is a win-win

situation for both.

Women And Development

India-Pakistan Trade

v


around 23 per cent. The domestic savings ratio has also been stagnant, while

Bangladesh's export regime is fairly narrow with five groups constituting 80 per

cent of all exports. Bangladesh also suffers from the same problems which afflict

other countries, such as corruption, inefficient choice of investment, and capital

flight- all explaining low growth. Nevertheless, since 1999, the growth rate has

been above 5 per cent in all but one year, although the poverty rate still stands at

50 per cent- classified as poor and 30 per cent as 'extremely poor'. In addition,

income disparities have also been increasing.

Dushni Weerakoon, Fellow at the Institute of Policy Studies of Sri Lanka,

presents a political economy perspective of the economic reforms that have taken

place in Sri Lanka since the late 1970s. He shows that there has been a great deal

of structural transformation of the Sri Lankan economy over the years and that,

as in the case of many other countries, the services and industrial sectors have

replaced agriculture as the main contributor to the economy. Sri Lanka saw two

generations of reforms which were very typical and mirror those that have taken

place in Pakistan. While the results under such reforms tend to be 'mixed', the

more interesting factor which distinguishes Sri Lankan economy from other

countries has been its domestic war and longstanding ethnic conflict. Weerakoon

shows that the costs of this domestic war have been quite severe, and only after

the peace initiative and cease-fire in early 2001 did the economy pick up some

steam. However, in recent months, the political system in Sri Lanka has suffered

a serious shock from differences between the Prime Minister and the President,

which have had an adverse impact on the economy. With this impasse likely to

persist, it seems that the gains made by Sri Lanka in the last three years may not

be sustained.

Dr Gunanidhi Sharma, professor of Economics at Tribhuvan University,

Kathmandu, traces the history of developments in Nepal which have had an

impact on the economy of that country. He elaborates on the relationship Nepal

has had with its neighbours, particularly India, and shows how this has affected

Nepal's development. Nepal's economy has not been doing very well in recent

years, with growth rates low or negative, and with poverty in excess of 42 per cent

of the population. With 87 per cent of the population in rural areas, agriculture

(and tourism) dominate the economy. Due to deteriorating political conditions

and the ongoing Maoist insurgency, there has been a destruction of

infrastructure, which has had a negative impact on agriculture, tourism and

economy. Professor Sharma argues that Nepal's economic policies have been

India and urban-centric which have made the situation worse.

Sri Lanka: Peace and Economy

Nepal: Low Equilibrium Trap

Caste Politics in India

Aditya Nigam, Fellow at the Centre for the Study of Developing Societies (CSDS),

New Delhi, looks into the caste factor in defining social agendas, both by the

proponents of deprived Other Backward Classes (OBCs) and the modernists who

reject it for being casteist and archaic, especially after the implementation of the

recommendations of the Mandal Commission. He shows how dominant castes

continue to resist the inclusion of Dalits and OBCs into the mainstream and

alleviation of their suffering in the name of modernity. Similarly, the author

analyses the inner conflict between the Dalits (untouchables) and the relatively

well-off but deprived OBCs, and its ramifications on political alliances.

vii viii


results were far from satisfactory, and a case study for Sri Lanka observed:

'SAPTA…has had no significant impact in changing the existing trade pattern of Sri

Lanka vis-à-vis its South Asian partners' (Weerakoon and Wijayasiri, 2001: 21).

Mukherji (2002: 98) concluded: 'Except for India, none of the other contracting states

has conceded meaningful tariff cuts. The effects of trade liberalisation are thus

modest.'

he progress of economic cooperation under the SAPTA umbrella and the design Tof a SAFTA agreement got delayed during the period 1999-2001 due to the 1deterioration of Indo-Pakistan relations . An attempt was made in December 2000 by

a newly formed South Asian Citizen's Commission to pressurise SAARC member

states to get the SAFTA 'Framework Treaty' by late 2001 but to no avail. A Summit

could not be held during this three-year period and the 11th SAARC Summit took

place in January 2002 in Kathmandu. In this summit, a decision was taken to have

the SAFTA Treaty ready by the 12th SAARC Summit. The SAARC Secretariat

coordinated the work of the commerce ministries of the respective SAARC member

countries in preparing the SAFTA agreement. Meanwhile, the 4th round of SAPTA

negotiations took place in October 2002.

The four rounds of SAPTA had resulted in coverage of over 5,000 tariff line items

(SAARC, 2002). Studies have shown that the SAPTA process contributed very little in

stimulating intra-regional trade (Mukherji, 2002, SACEPS, 2002a, and others). Due

to the slow progress of the regional initiative of promoting trade, a number of SAARC

member countries decided to embark on bilateral free trade agreements (BFTA). The

Indo-Lanka BFTA was signed in late 1998 and came into operation in early 2000.

Long existing Indo-Nepal treaties were formalised as a BFTA in 1996 (RIS, 2004: 53).

A number of other sub-regional initiatives such as growth quadrangles (Bangladesh,

Bhutan, Nepal and India) and triangles (Sri Lanka, Maldives, South India) were

mooted and some of them were initiated. These sub-regional initiatives were not

considered for preferential trading but for sectoral cooperation.

In addition, several South Asian countries joined wider regional groupings in Asia

such as the Indian Ocean Rim Association for Regional Cooperation (IOR-ARC

initiated in 1997) and BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand

Economic Cooperation initiated in 1997). Both these groupings were not preferential

trading blocs- IOR-ARC was based on open regionalism where unilateral trade

liberalisation was advocated, while BIMSTEC was initially based on sectoral

cooperation. Membership in such pan-Asian regional groupings was obtained by some

South Asian countries in the hope of gaining more economic benefits, which the

SAPTA process was not delivering.

learly, the SAFTA agreement has come at a time when the trading environment in CSouth Asia is complicated by the slow progress of SAPTA and a number of

parallel regional and pan-regional initiatives are in place. It would, therefore, be

pertinent to examine whether the SAFTA agreement has taken into account the

factors governing the slow progress of SAPTA and the complications created by

10


SAFTA : A CritiqueDr Saman Kelegama

I. IntroductionSAARC is well reputed for limited achievements on core issues. The fact that the

South Asian Free Trade Area (SAFTA) agreement was signed at the 12th SAARC

Summit in January 2004 is in itself an achievement. SAFTA was long overdue, the

turbulent South Asian regional politics having often delayed its finalisation. In fact,

there was a time when it appeared that SAFTA would remain only a vision (Kelegama,

1996, Mukherji, 2002).

AFTA was first mooted at the 8th SAARC Summit in Delhi (1995), it was Ssuggested then that it should come into operation by 2005. This date was revised

at the 9th SAARC Summit in Male (1997), where it was declared that SAFTA should

come into operation by 2001. However, the 9th SAARC Summit also took a decision to

appoint a Group of Eminent Persons (GEP) to draw up a vision and a roadmap for

SAARC. Obviously, the GEP had to look at SAFTA and its feasibility by 2001. At the

10th SAARC Summit in Colombo (1998), the GEP report was presented which stated

that a more realistic timetable for SAFTA is 2008 and, for the least developed

countries in South Asia this date was extended to 2010 (GEP, 1998).

At the Colombo Summit, the date for SAFTA was postponed without specifying any

time bound target, but a decision was taken to have a 'Framework Treaty' by the year

2001. Due to regional politics, the preparation of the Treaty got delayed and it finally

came into shape by January 2004.

In this paper, an attempt is made to examine the SAFTA agreement that was signed

by the Foreign Ministers of the SAARC member countries at the 12th SAARC Summit.

First, a brief survey is made in Section II on SAPTA. Section III then makes an

assessment of the SAFTA agreement in the light of the GEP report recommendations.

Section IV has some concluding remarks.

II. SAPTA to SAFTAWhile the debate for the SAFTA timetable was going on, there was some progress in

the South Asian Preferential Trading Arrangement (SAPTA) which came into

operation in December 1995. By the time of the 10th SAARC Summit in July 1998,

two rounds of SAPTA had been completed and close to 2,126 products were under

tariff preferences but the progress had been slow (IPS, 1999: 22). It adhered to four

modalities for tariff negotiations, viz., (a) product-by-product approach, (b) across-

the-board tariff reduction, (c) sectoral tariff reduction and d) direct trade measures.

The third round of SAPTA was completed by November 1998. By early 2000, the

9


parallel initiatives.

he SAPTA framework was basically guided by the 'positive list' approach, though Tthere were instances where sectoral tariff preferences were considered between 2member countries . The process adopted by SAPTA was extremely time consuming

and slow. Moreover, at least in the first two rounds of SAPTA, non-tariff barriers

(NTBs) were not considered for removal with the granting of tariff preferences. In a

nutshell, besides these problems: (1) the tariff cuts were not deep enough, (2) a wide

range of goods was not subject to preferential tariffs and (3) some actively traded

goods were left out from preferential tariffs. These problems were visible in the first

preferential trading arrangement in Asia, i.e., the Bangkok Agreement (BA) and were 3highlighted before SAPTA came into operation but the same mistakes were repeated .

III. SAFTA Treaty and the GEP ReportJean Monet spoke of European integration in the 1950s and some ridiculed him as a

dreamer at that time. However, Monet's dream was realised in a 40-45 years' time

period. Likewise, some commentators have expressed various reservations on the

GEP vision of a South Asian Economic Union by 2020. However, it is not an 4impossibility as the realisation of the European Union clearly indicates. The GEP

Report on 'SAARC Vision Beyond the Year 2000' still awaits adoption by the SAARC

Council of Ministers. This is in contrast to other regional groupings such as APEC,

where their GEP Report was adopted and put into practice soon after its submission.

The SAARC GEP Report has many suggestions, and with regard to movement towards

a free trade area, the report, after taking cognizance of the problems encountered by

SAPTA, recommended a 'negative list' approach for tariff reduction with an annual

12.5 per cent tariff reduction by member states, removal of all NTBs within a time

frame, and a number of other trade facilitating policies. The SAFTA agreement is a far

cry from the recommendations of the GEP Report. The tariff reduction process,

timetable, additional measures (or direct trade measures) etc., differ significantly

from the GEP recommendations. Moreover, there are inherent shortcomings in the

agreement.

any important items critical for the success of SAFTA are left for negotiations Msuch as the rules of origin (Article 18), negative list, areas for technical

assistance, etc. This could cause considerable delay and might make it difficult to

have the SAFTA process fully operational by 01 January, 2006 (the declared date).

It is stated in Article 07 that for non-least developed countries (non-LDCs) the

existing tariffs should be reduced to 20 per cent in two years and thereafter in a five

year period, tariffs should be reduced to 0 - 5 per cent (Sri Lanka is given a period of

six years). Least developed countries (LDCs) should reduce their tariffs to 30 per cent

in two years and thereafter should bring down the tariffs to 0-5 per cent within an

eight year period. If however, tariffs are below 20 per cent for non-LDCs, it is stated

that an annual 10 per cent reduction should be made for two years. And for LDCs, if

tariffs are below 30 per cent it is stated that an annual 5 per cent reduction should be

made for two years. There is a 10-year period commencing 01 January 2004 for the

FTA to become fully operational. Once the existing tariffs are reduced in accordance

with the above format and completed by 01 January 2006, the subsequent tariff

reduction process is aimed at achieving 0-5 per cent tariff rates by the end of eight

years for LDCs and by the end of six years for the non-LDCs. The non-LDCs (and

LDCs) are encouraged to adopt reductions in equal annual instalments of not less

than 15 per cent (and 10 per cent for LDCs) annually.

The above format of tariff reduction is a substantial departure from what is

recommended in the GEP Report and is somewhat close to what the SAARC Chamber 5of Commerce and Industry (SCCI) suggested . The problem with this format of tariff

reduction is that, despite reduction of average tariffs, distortions will prevail in the

form of high tariffs in particular products in some countries. Perhaps it would have

been more efficient if convergence was achieved before embarking on lowering tariffs

further. In order to ensure that the benefits incur to all member countries, achieving

convergence as in the case of the ASEAN-FTA is always better.

lthough Quantitative Restrictions (QRs) will be removed as soon as the tariff Alevels reach 0-5 per cent, it is not clear from Articles 06 & 07 (4 & 5) whether

other NTBs will be removed with the QRs. Moreover, if the Treaty is going to strictly

adhere to this method of removal of various NTBs, it will be difficult to exploit the full

gains from various phases of tariff reductions, thus defeating the objective of

preferential tariffs. There is no reference to a movement towards a Customs Union 6after the FTA in the SAFTA agreement- a key recommendation of the GEP Report .

Article 7.3 (a & b) refers to the negative list. It is stated that the number of products

in the negative list shall be subject to a maximum ceiling that is mutually agreed upon

among the member states and will be reviewed every four years. There is no deadline

for determining the negative list and there is no format for phasing out the negative

list over the years. All these issues seem to have been left for discussion by the SAFTA

Ministerial Council established under Article 10. If the negative list becomes too long,

the agreement may not become compatible with Article XXIV of GATT. In fact,

SAPTA comes under the Enabling Clause of the GATT, which is considered by some

commentators as non-serious in commitment for it to cover 'substantially all the

trade' as stipulated in the GATT (Kelegama and Adhikari, 2002).

hen items critical for the success of an FTA are left for negotiation, the Wfinalisation can get delayed. This was the case with the Indo-Sri Lanka BFTA

where the negative list was open for negotiation. Consequently, it took nearly one year

and two months for the agreement to become effective after it was signed. Various

disagreements had to be sorted out before finalisation. The phasing out of the

negative list could have been based on the ASEAN FTA model where there was a clear

strategy with a tariff line classification based on an Inclusion List, Temporary

Exclusion List, Sensitive List and a General Exception List for implementing a

Common Effective Preferential Tariffs (Mukherji, 2002; SACEPS, 2002a). This

dimension has been completely ignored in the SAFTA agreement.

11 12


To reduce the cost of structural adjustment, 'additional measures' are required.

Additional measures in Article 8 do not measure up to the GEP report, where

reference has been made for an establishment of a South Asian Development Bank,

South Asian Development Fund and a South Asian Energy Grid. The GEP report has

strongly recommended the creation of a SAARC Investment Area and vertical

industrial integration. None of these receive mention in the agreement and it does

not provide for creation of a mechanism for pursuing additional measures under 11Article 8 .

There is a sizeable body of literature on South Asia Energy Grid (SACEPS, 2002b;

RIS, 2002; and others). A SAARC Investment area has also been looked at in recent

literature (SACEPS, 2002c; RIS, 2002; and others). In fact, the trade-investment

nexus has come into effective operation in South Asian bilateral FTAs and RIS (2004)

shows how the large trade deficits between two countries have been compensated by

the capital account through significant investment flows. In the context of investment

flows, horizontal and vertical integration of industries of South Asia becomes 12important to face the global competitive pressures . Even though a multitude of

literature is available on these crucial issues, the agreement has completely

overlooked these areas and solely focused on trade facilitating measures in Article 8.

inally, the agreement is silent on how SAFTA is going to integrate the existing Fbilateral free trade agreements between some SAARC countries (such as the

Indo-Lanka BFTA, Indo-Nepal BFTA, and the ones that are under consideration, for

example, Pakistan-Sri Lanka BFTA and Indo-Bangladesh BFTA) into the SAFTA

agreement. If integration is not an option, will SAFTA operate parallel to the existing

treaties?. This seems to be most likely and will create a 'Spaghetti Bowl' type of

phenomenon (a la Bhagwati, 2002) with parallel preferential tariffs, rules of origin 13and negative lists . Thus the Customs and Commerce Departments in individual

SAARC countries will have to be upgraded to meet this challenge.

Since trading in SAARC basically means to trading with India, this objective seems to

have been met in the current trading environment by bilateral FTAs. Thus, SAFTA

will basically boil down to trading between India and Pakistan. If the remaining

bilateral FTA with India, viz., Indo-Bangladesh comes into operation soon, there are

reasons to believe that there will be less enthusiasm among some SAARC countries

about SAFTA.

he SAFTA agreement does not refer to liberalisation of trade in services. A Tregional trade arrangement should not only be deepened but widened as well.

For example, the Indo-Sri Lanka BFTA has now been advanced to an Indo-Lanka

Comprehensive Economic Partnership Agreement where liberalisation of services (in

addition to investment) has been included. The BIMSTEC Free Trade Area that was

signed in early February 2004 refers to liberalisation of services under a GATS-Plus 14framework in Article 4. In short, the SAFTA agreement is not futuristic .

14


n addition to the differential tariff reduction format, the agreement makes a

number of provisions for according special and differential treatment to the LDCs Iin the region (Article 11). There are provisions for non-LDCs considering direct trade

measures in favour of the LDCs, such as long and medium-term contracts containing

import and supply commitments in respect of specific products, buy-back

arrangements, state trading operations and government procurement. LDCs will get

special consideration for technical assistance, in particular, to compensate for revenue

shortfalls from tariff reductions. These measures do not go far enough to ensure that

LDCs will be able to derive equitable benefits from SAFTA. It was this concern that

made Bangladesh hesitate till the last minute before signing the agreement.

Bangladesh wanted non-LDCs to refrain from imposing anti-dumping and

countervailing measures against LDCs, and rightly so, since no such provision exists

in any other existing FTA. This concern was partially accommodated by stating: 'The

Contracting States shall give special regard to the situation of LDCs when considering

application of anti-dumping and countervailing measures'. [Article 11 (a)]

The agreement does not consider the suggestion of the GEP for creation of a large

fund for development of infrastructure, human resources and improvement of export

supply capacity of LDCs. Without significant structural changes in the production

structure, LDCs are unlikely to derive equitable benefits from SAFTA. SACEPS

(2002a) has shown that in the EU for raising the level of development in the less

developed member countries such as Spain, Portugal and Ireland, the European

Commission had created a development fund for each of them amounting to 3- 5 per

cent of their GDP. Such arrangements have not been considered in the agreement,

perhaps due to reservations expressed by non-LDC member countries.

It would be imperative to ask at this juncture why many SAARC members shy away

from preferential tariff reduction. The first reason is rigid factor markets- in

particular, labour and capital- prevalent in most SAARC member countries. These

factors of production find it difficult to move out due to tight legislation governing 7them when the industries are subject to restructuring as result of tariff liberalisation.

Consequently, instead of industry restructuring, what takes place is closing-down of 8industries with serious social and political consequences . This is an issue for

economies where the small and medium scale enterprises dominate the industrial and

agricultural sectors in terms of employment. Thus, considerable structural

adjustments also have to take place, particularly in LDCs to face tariff reforms with a

greater degree of confidence.

econd, there is a fear among the smaller countries that the main beneficiary from 9Stariff liberalisation would be the larger countries . Irrespective of the theoretical

10viewpoint , the perception of smaller countries needs to be recognised, and it was this

realisation that led to the 'Gujral Doctrine' to be introduced by India in 1997/98.

However, there is some dilution of the doctrine in recent years and giving vent to this,

an editorial of the Economic and Political Weekly (EPW) stated: 'It is for India to

ensure that smaller members of the region have a growing stake in regionalism ….

This responsibility India has not taken seriously'. (EPW, January 10-16, 2004: 119)

13


The above-mentioned technical shortcomings are obviously going to get aggravated by

regional politics. Much will depend on whether Pakistan would offer MFN status to 15India in 2004 . Present indications are that there is a commitment to a peaceful

settlement of the long-standing bilateral dispute between India and Pakistan.

However, if the MFN issue between the two nations is not settled soon, it will be a

major obstacle to the birth of SAFTA.

he Indian Prime Minister stated in 2003 that South Asia should move towards a Tcommon currency. Obviously this would be possible if there is monetary

cooperation among South Asian countries. Currently, under SAARCFINANCE a

discussion on monetary cooperation is ongoing. Moreover, literature on the subject is

also on the increase (Maskey, 2002; RIS, 2004; and others). RIS (2004), for instance,

has suggested the introduction of a parallel currency as the first step towards moving

to a common currency. The subject did not receive any attention from the 12th

SAARC Summit. It appears that the futuristic proposals have been set aside in order

to cover the backlog that has accumulated due to the frequent postponement of

SAARC Summits.

IV. Concluding RemarksWhether regional trade is the best available option for South Asia has been a subject

of debate since the mid-1990s. Critics of promoting regional trade in South Asia via

preferences have argued that South Asia would be better off focusing on trade with the

rest of the world, in particular, EU and USA (Srinivasan, 1994; Pigato et al., 1997;

Panagariya, 1999; and others). A recent report released by the World Bank (2003)

argues: 'Because many tariffs in the region are very high, especially in India and

Bangladesh, there are large potential trade diversion costs for the region as a whole if

the various preferential trade agreements were ever to be seriously implemented. The

consequent reductions in economic welfare would show up principally in reduced

customs revenue and terms-of-trade losses. It is unlikely that benefits through

increased competition, economies of scale, or improved operating efficiency of import

competing firms would outweigh these overall economic costs. There are much larger

gains for increased trade with the rest of the world (ROW), especially trade with the

developed countries and with more advanced developing countries in South East Asia,

including China. This is because the South Asian countries have a comparative

advantage in relation to ROW in similar, mostly labour intensive products, and the

volume of trade and the economic benefits from trading these products among

themselves are limited by comparison.' (p. 22)

n the other hand, those who argue the case for regional trade state that Osubstantial trade is already taking place in South Asia with informal trade

amounting to a large proportion of formal trade. The exact intra-regional trade is

estimated anywhere between 8-10 per cent. Although studies have shown that there

are limited complementarities in the SAARC region, it is argued that this was also the

case in ASEAN during the mid-1970s, and that dormant complementarities in the 16region could be invigorated by intra-regional investment and FDI . They also argue

the cost of non-cooperation to be quite high (RIS, 2004 and 1999; GEP, 1998; CUTS,

1996; and others). The debate is far from settled. Irrespective of the debate, there is a

general belief that regional cooperation in South Asia should not be viewed only from

the trade perspective, and that there are many gains from regionalism in other areas.

he past decade has seen the emergence of a number of regional trading blocs in Tdifferent parts of the world and data shows that nearly 60 per cent of world trade

is now conducted on preferential basis. The countries that are not part of a trade bloc

face the risk of discrimination of their exports and loss of competitiveness. Thus, in

the light of global trends, irrespective of the pros and cons of the academic debate,

South Asia has been pushed to adopt regional economic integration. In the SAARC,

promoting intra-regional trade is part of a large package of economic cooperation and

SAFTA is a part and parcel of South Asian Economic Cooperation.

However, the movement to SAFTA is taking place in an environment where: (1) the

precursor to SAFTA, i.e., the four rounds of SAPTA have failed to show concrete

results, (2) several bilateral FTAs are well entrenched in the South Asian trading

system, and (3) South Asian tariffs are already coming down under World Bank/IMF

structural adjustment programmes. The third factor in effect is automatically

reducing the preferential margin. Moreover, there are a number of shortcomings,

clauses open for interpretation and items for further negotiations in the SAFTA

agreement This shows that most of the research work that was done by the SAARC

second-track 'think tanks' has not been fed in effectively to the SAARC first-track or 17the official process .

iven this situation, not much can be expected from SAFTA. The initial euphoria Gthat comes with the signing of the SAFTA agreement will soon taper away. The

realities and the geo-politics of the region will once again determine the pace of

negotiations in SAFTA. By that time, the bilateral FTAs would have delivered most of

the results for the smaller South Asian countries and SAFTA will be an agreement

mainly to promote India-Pakistan trade. Is it due to this realisation that the SAFTA

agreement did not bother about a vision and ignored a number of worthy suggestions

of the GEP Report?

(Dr Saman Kelegama is the Executive Director, Institute of Policy Studies of Sri Lanka).

End Notes1. Kargil conflict and subsequent military standoff.2. In the third round, sectoral tariff preferences were exchanged between India and

Bangladesh (SACEPS, 2002a).3. It was highlighted that the Bangkok Agreement failed to be an effective preferential

agreement due to such shortcomings and SAPTA should take due caution of this (Kelegama, 1996).

4. The GEP report is taken as a reference point in this paper in the absence of any other document on the vision for South Asia. For a critique on the GEP Report, see, for instance, Jayasekera (2001).

5. See Mukherji (2002:93).6. Sometimes the movement to a Customs Union may be a problem due to political economy

factors. When this is the case, member states could consider alternative routes to deepen

15 16


Perspective', South Asian Survey, vol. 6, no. 2 1999.lS. Kelegama, 'SAPTA and its Future', South Asian Survey, vol. 3, nos. 1 and 2 1996.lN.M. Maskey, 'South Asian Monetary Integration in Light of the Optimum Currency Area

Criterion of Pattern of Shocks,' South Asia Economic Journal, vol. 2, no. 2, 2001.lI.N Mukherji, 'Charting a Free Trade Area in South Asia: Instruments and Modalities', in

T.N. Srinivasan (ed.), Trade, Finance, and Investment in South Asia, (New Delhi: Social

Science Press, 2002).lA. Panagariya, 'Trade Policy in South Asia: Recent Liberalisation and Future Agenda', The

World Economy, June 1999.lM. Pigato, et al. (1997), South Asia's Integration into the World Economy, (Washington,

D.C.: The World Bank, 1997).lRIS, South Asia Development and Cooperation Report 2004, Research and Information

System for Non-Aligned and Other Developing Countries, New Delhi, India 2004.lRIS, South Asia Development and Cooperation Report 2001/02, Research and

Information System for Non-Aligned and Other Developing Countries, New Delhi, India

2002.lRIS, SAARC Survey of Development and Cooperation 1998/99, Research and Information

System for Non-Aligned and Other Developing Countries, New Delhi, India 1999.lSAARC, 'Regional Economic Cooperation Initiatives within the SAARC Region' and 'A Brief

on SAARC', (Kathmandu: SAARC Secretariat, 2000).lSACEPS , SACEPS Task Force Report on SAFTA, South Asia Centre for Policy Studies

(SACEPS), Dhaka, Bangladesh, (2002a).lSACEPS , SACEPS Task Force Report on South Asian Investment Cooperation, SACEPS,

Dhaka, Bangladesh, (2002b).lSACEPS , SACEPS Task Force Report on Energy Cooperation in South Asia, SACEPS,

Dhaka, Bangladesh, (2002c).lT.N. Srinivasan, 'Regional Trading Arrangements and Beyond: Exploring Some Options for

South Asia Theory, Empirics, and Policy', Report no. IDP-142, South Asia Region,

(Washington, D.C: The World Bank, 1994).lD. Weerakoon and J. Wijayasiri, 'Regional Economic Cooperation in South Asia: A Sri

Lankan Perspective', International Economic Series, no. 6, (Colombo: Institute of Policy

Studies 2001).lWorld Bank, 'Trade Policies in South Asia: An Overview', Poverty Reduction and Economic

Management, South Asia Region, (Washington, D.C: The World Bank, May 2003).

18


economic integration, such as working out a Comprehensive Economic Partnership Agreement (CEPA). The Indo-Sri Lanka BFTA currently is considering such an approach to deepen economic integration (see, for instance, Kelegama, 2003). SAFTA can always explore new paths for deepening integration if a Customs Union is not feasible.

7. Sometimes when institutions are not in place to support restructuring, the process becomes more complicated.

8. It is acknowledged that some inefficient industries have to close down if they are not competitive. However, even potentially competitive industries close down due to unfriendly factor markets.

9. A discussion on this is available in Kelegama (1999).10. RIS (2002), for instance, has argued that it is the small countries that would benefit most

from trade liberalisation; however, the debate is far from settled (Weerakoon and Wijayasiri, 2001).

11. Some items get mentioned in the Declaration of the 12th SAARC Summit. 12. RIS (2004) provides an excellent example of how horizontal and vertical integration could

take place in industries of the region by taking the case of the textiles and garment sector.13. For example, Sri Lanka can export cloves under preferential tariffs to India under the

Bangkok Agreement, SAPTA and the Indo-Sri Lanka BFTA. In the near future, it will also have the privilege of exporting cloves to India under the BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation) FTA.

14. It is only in the 12th SAARC Summit Declaration that reference is vaguely made to a future Customs Union and thereafter a South Asian Economic Union.

15. India granted MFN status to Pakistan in 1995 but the latter has been reluctant to reciprocate and has linked the trade settlement to the Kashmir dispute.

16. Intra-regional trade in ASEAN was close to 6 per cent in the mid-1970s, but now has increased to around 23 per cent. ASEAN too was characterised by limited complementarities at the beginning but the situation changed with preferential trading, FDI and intra-regional investment (SACEPS, 2002a). For details on limited complementarities in SARRC, see Din and Qadir (2004).

17. SACEPS (2002a) report, where many of the problems associated with the movement to SAFTA were identified, was submitted to all the Foreign Ministries of SAARC member countries before the 12th SAARC Summit. In fact, all of them received copies in early 2003. However, none of the recommendations given to address the problems in the report seem to have been taken into account.

Bibliographyl

lCUTS, 'Cost of Non-Cooperation to Consumers in the SAARC Countries: An Illustrative

Study', Working Paper, Consumer Utility Trust Society, Jaipur, India 1996.lMusleh-uddin and U. Qadir, 'Revealed Comparative Advantage and Trade

Complementarity in South Asia', South Asia Economic Journal, vol. 5, no. 2 (2004

forthcoming).lEPG, The Report of the SAARC Group of Eminent Persons, SAARC Secretariat, Kathmandu

1998.lIPS, Sri Lanka: State of the Economy 1999, (Colombo: Institute of Policy Studies, 1999).lD. Jayasekera, 'GEP Report: Critical Evaluation of Economic Aspects' in S. Kelegama, (ed.),

Impediments to Regional Economic Cooperation in South Asia, (Colombo:

CASAC/FES/IPS publication, 2001).lS. Kelegama, 'Sri Lankan Exports to India: Impact of Free Trade Agreement', Economic

and Political Weekly, vol. XXXVIII, no. 30, July 26-August 1, 2003.lS. Kelegama and R. Adhikari, 'Regional Integration in the WTO Era: South Asia at

Crossroads', SAWTEE/CUTS-CITEE Discussion Paper, SAWTEE, Kathmandu, Nepal

2002.lS. Kelegama, 'SAARC From Association to Community: A Small Country Economic

J. Bhagwati, Free Trade Today, (New Delhi: Oxford University Press, India 2002).

17


Aid, Governance and OwnershipProfessor Rehman Sobhan

Changing Trends in ODAFor many years, beginning from the 1950s, South Asia was the poster-child of foreign

aid, known also as Official Development Assistance (ODA), offered by the Advanced

Industrial Countries (AIC) as well as the Communist countries to the developing

world. South Asia was seen as the first battleground of the cold war for the hearts and

souls of the Third World. India and China were projected as the symbolic protagonists

of this epic struggle between democracy and communism and foreign aid was seen as

the currency which could influence the course of this struggle. In the halcyon days of

foreign aid in the 1960s, posters of earnest young Peace Corp workers- the children of

the Kennedy era of an idealistic United States- vaccinating impoverished Pakistanis or

teaching school to earnest Indian villagers were part of the popular image of foreign

aid. U.S. food surpluses distributed as aid under the PL480 programme were expected

to remove hunger and provide jobs to the rural unemployed through various public

works programmes. It was believed that aid, wisely invested in building power

stations, roads, bridges, schools, hospitals, even industries, would banish poverty

from South Asia, and help to sustain the democratic project. Five Year Plans were

seen as the appropriate vehicle for absorbing and programming foreign aid because

the planners could model the two resource gaps of savings/investment and foreign

exchange which were seen as the principal constraints to economic growth in

developing countries.

uch aid has since been invested in South Asia over the last four decades. MBetween 1980 and 2001, US$ 17 billion has flown into South Asia as ODA.

However, in recent years, aid flows into this region have been exposed to steady

decline in both absolute and relative terms. Table I shows that ODA inflows per capita

as well as a % of GDP declined between 1990 and 2001. This decline was registered in

all countries of the region, except Pakistan. The share of aid flowing to South Asia as a

proportion of total ODA also declined from 18.5 per cent in 1980, to 12.6 per cent in

1990 and, eventually, 11.7 per cent in 2001. In real terms total aid received in 2001

was discernibly less than in 1980. The only country which enjoyed an increase in aid

in recent years has been Pakistan which led to an increase in per capita inflows in

2001 compared to 1990 as well as in the ODA/GDP ratio. As we will discuss later,

Pakistan's unique experience derived largely from its changed strategic circumstances

in the wake of the war in Afghanistan.

As a consequence of this restructuring of global aid flows, South Asia has become

increasingly less dependent on aid in relation to its development process. Some

countries, such as India and Pakistan, have been conspicuous in their resort to private

capital inflows to compensate for the decline in ODA. Table 1 also shows the changing

composition of external capital inflows and the declining shares of aid in relation to

underwriting total capital inflows. India is now for all practical purposes no longer an

aid recipient, even though in 2001, it did receive US$1.7 billion in ODA. This amounts

to 0.4 of its GDP and a small part of its total public expenditure. A great part of this

aid inflow to India comes in the form of non-concessional loans from multilateral

financial institutions.

outh Asia's reduced dependence on aid owes in large measure to its robust export Sperformance in the area of goods and services since the 1990s. However, this

export boom, particularly in the area of goods, has been heavily concentrated in North

America and the European Union, and for countries other than India, on a narrow

range of items such as textiles and ready-made garments or tourism. This has opened

up new sources of dependency and erosion over policy autonomy.

Changing Donor PerspectivesThe decline in aid inflows into South Asia is reflected in the changing perspective of

aid donors to the development discourse which underlies donor-recipient relations.

The principal aid donors to South Asia, led by the World Bank, have begun to change

both the composition of their aid and also the underlying policy advise associated with

such aid. In South Asia, ODA flows had traditionally been heavily concentrated in the

more capital intensive areas of physical infrastructure such as energy, transport and

communications and even industry. Until the mid-1980s, multilateral institutions

such as the World Bank and Asian Development Bank were the principal financers for

infrastructure projects and were even financing investment in state owned

enterprises. Bilateral donors such as U.K., Federal Republic of Germany (FRG) and

Japan were particularly active in financing investments in the power, transport and

communications sectors. In the 1960s the World Bank was the principal financer of

the state owned Ghorasal Fertilizer Factory in Bangladesh and in the 1970s the ADB

was the principal investor in the Ashugonj Fertilizer factory. In the 1960s and 70s,

bilateral donors were particularly active in financing public sector investments in the

industrial sector. The U.K. and FRG pioneered public investment in the steel sector in

India which was matched by the USSR investments in the steel sector as well as a

broad range of SOEs in India and Pakistan, including what is now Bangladesh. The

USSR finance for the steel mill in Karachi in the late 1960s was one of the biggest

projects of its kind in Pakistan. These investments in capital intensive, highly visible

public projects, provided tangible evidence of donor realpolitik in the 'great game' in

South Asia.

he changing composition of ODA coming into South Asia in the 1980s and 90s Treflected the growing influence of ideology over realpolitik in the aid practice of

both bilateral and multilateral donors and its intrusion into their aid priorities. While

the U.S. was always reluctant to invest in public sector industry, it continued to

support infrastructure projects and was one of the principal financiers of the Rural

Electrification Project in Bangladesh beginning in the late 1970s. Although the

19 20


t was, with some distinguished exceptions- in the DCs and the transitional

economies (TEs)- the apparent failure of the aid driven reforms of the 1980s to Ieither promote sustained growth or alleviate poverty which has now inspired a further

change of direction in donor aid strategies. The sense of frustration amongst the

taxpayers of the North had by now extended from the `right' to the `left' led by the

NGOs, radical academics and church groups. The critics projected the 1980s as an era

of failed reforms, which not only did not improve growth but made a small fraction of

these Third World countries very rich whilst the poor remained poor. The `right'

continued to challenge the very assumptions of aid and remained unimpressed by the

decade of reforms initiated in many developing countries under the leadership of the

World Bank and IMF.

Putting Governance First To cope with critics from both the 'left' and 'right' the new focus on aid strategy in

South Asia appears to be directed to the establishment of good governance and

targetting aid to the poor through what James Wolfensohn, the incumbent President

of the World Bank, termed the challenge of inclusion. The literature of the World

Bank in the 1990s indicated that the World Bank, at least, had recognised that a

combination of getting policies and governance right was likely to alleviate poverty.

The World Bank's widely discussed empirical work on Assessing Aid claimed that

'with' sound country management, 1 per cent of GDP in assistance translates into 1

per cent decline in poverty. Thus, it stated that a US$ 10 billion increase in aid would

lift 25 million people a year out of poverty- but only if it favours countries with sound

economic management. By contrast, the Bank paper argued that an across the board

increase of US$ 10 billion would lift only 7 million out of their hand to mouth

existence if economic management was weak.

This World Bank study further argued that 'improvements in economic institutions

and policies in the developing world are the key to a quantum leap in poverty

reduction'. Such effective use of aid is also seen to complement private investment.

Promoting aid effectiveness thus demanded the use of aid in strengthening

institutions as well as policies and bringing about an active engagement of civil society

in the design and delivery of aid. These conclusions of the World Bank study are

apparently derived from intensive empirical work on aid effectiveness based on

reviewing a large sample of DCs and aid projects.

he original paper on Assessing Aid contained a number of serious flaws in the

assumptions as well as design of the analytical model used in the study whilst Ttheir empirical evidence merited more careful scrutiny. The original definition of

sound management incorporated a mix of three policies: reducing the budget surplus

as well as the rate of inflation and realising increased trade openness. These reforms

were packaged with institutional quality which was defined as an admixture of

strength of the rule of law, quality of the public bureaucracy and pervasiveness of

corruption. It would be necessary to examine the metric for such abstract concepts as

rule of law and bureaucratic quality before assessing the weights assigned to these

four variables and three sub-variables of institutional quality. Such an exercise would

22


principal aid donors to South Asia were never averse to using the leverage provided by

their aid to influence the political complexion of regimes, their aid leverage in the last

two decades was mostly directed to influencing policy choices, at least in South Asia.

he change in the policy regime and direction of aid to South Asia in the 1980s Treflected the growing disillusion with the effectiveness of aid not just to South

Asia but to most of the developing world. By the end of the 1970s it was increasingly

believed in the AICs that the massive aid flows to South Asia in the last two decades

had neither alleviated poverty nor generated sustained economic growth. This

disillusion with aid originated from among the tax payers of these aid giving countries

as much as from the particularist constituencies of the 'right' and 'left' who questioned

the quality of aid effectiveness. In the AICs, the resistance to a rising tax burden was

growing and tax payers were particularly incensed that their taxes may end up in

developing countries to be dissipated in wasteful public expenditures permeated with

corruption. The juxtaposition of persistent poverty with the growing affluence of a

narrow elite in the developing world enabled tax payers to join hands with aid critics

in questioning the efficacy of aid. Within the developing world the costs of aid

dependence were being recognised and the hegemonic influence of aid donors on the

policy discourse of aid dependent countries was being challenged. Academic work on

the limitations of aid in stimulating development was very much in evidence.

s the cold war drew to its conclusion, it was no longer acceptable for once Astrategically favoured states to go on misusing aid with impunity. The main

challenge to the sustainability of aid budgets came from the disillusion of tax payers in

the North who questioned the complicity of the aid agencies in the donor countries in

contributing to this misdirection as well as misuse of aid and their collusive role in

building up a class of people who prospered from aid at the expense of the majority of

the citizens in developing countries (DCs). The response of aid agencies in the AICs to

this rising sense of outrage in the donor countries was thus driven both by the

expectation that this disillusionment with aid could be reversed as well as by their

compulsions for institutional survival. Aid agencies, seeking to protect their budgets

focussed on two themes in seeking to redesign aid strategies:

(i) Getting policies right.(ii) Redirecting aid to the poor.

The second part was, however, largely subordinated to the first because it was

believed by the dominant aid donors through the decade of the 1980s that the right

policies would stimulate growth which in turn would alleviate poverty. In order to get

policies right, aid was increasingly offered on conditional terms that policy reforms,

on lines suggested by the donors, would be put in place in the respective developing

countries (DCs). This agenda for policy reform was, in turn, heavily influenced by the

ideological input emanating from the Reagan and Thatcher administrations which

underwrote the so called Washington Consensus. In country after country, the World

Bank and IMF, known collectively as the Bretton Woods institutions (BWI), put in

place stabilisation programmes followed by a package of structural adjustment

reforms (SAR) inspired by the Washington Consensus.

21


permit a fuller appreciation of the empirical work correlating GDP growth with

economic policy and institutional quality. It will, however, be argued that the available

evidence from the South Asian experience does not conclusively support the

conclusions of the World Bank study on the role of governance.

otwithstanding its technical limitations, the World Bank study on Assessing Aid Nwas an important document. Its currency and extent of analysis on aid

effectiveness and the attempt to use empirical evidence to question the efficacy of a

decade of donor driven policy reforms underwritten by conditional offers of ODA,

made it a landmark document. The study appears to reflect a willingness of the World

Bank to encourage a more endogenous process of promoting policy reforms within

not just South Asia but also in the Third World. This rethinking in the World Bank

was further reaffirmed by a series of conferences organised by the World Bank around

the world to address the issue of policy ownership as a critical ingredient in any move

to promote better governance. The emphasis by the World Bank on prioritising

poverty was highlighted in their World Development Report (WDR) of 2001 whilst

the role of institutions was highlighted in the WDR of 2002.

his rethinking of aid policy was not limited to the World Bank. Other aid donors Tsuch as the OECD, the U.K., Canada, the Nordics countries, and the Netherlands

also sought to link good governance with aid effectiveness and argued that policy

ownership was crucial to the exercise of effective governance over development policy

in the developing countries. All such agendas to promote governance reform focused

on the need to prioritise the poor in the donor's allocative regimes. Such poverty

alleviating agendas are now increasingly concerned with issues of empowerment of

the poor and of women as integeral to the process of poverty alleviation.

Contradictions in the World Bank's New Aid StrategyBank programmes designed in an era when growth was prioritised over poverty have

not quite worked out how poverty alleviation could be integrated into the earlier

generation of structural adjustment reforms (SAR) programmes. The belief of the

1980s that high growth will reduce poverty may be something of a truism. However,

the earlier reforms neither generated sustained growth nor alleviated poverty so that a

new development model to reconcile growth with poverty alleviation is still awaited.

The current practice of simply adding on poverty related projects to the old

adjustment model appears to be a self-defeating exercise. If the original development

design was itself perpetuating poverty, accentuating inequalities and empowering a

small elite who use their wealth to monopolise state power, a few so- called poverty

centred projects will not ensure a sustainable assault on poverty or the empowerment

of the poor. Prioritisation of poverty in the aid agenda thus demands that the original

design of the reform process has to incorporate institutional mechanisms for ensuring

inclusion of the poor in the development process, giving them competitive access to

the market and institutionalised claims on resources, and scope for participating in

political power. Attempts to step up allocations for the poor through targetted aid is

hardly likely to disturb the realities of power in most DCs and transitional economies.

Serious contradictions also appear to arise between the prioritisation of governance in

aid agendas and the BWI commitment to policy lending. The distorting impact of

policy lending derives from its impact on policy ownership as well as the limited

access of the poor to the benefits of such reforms. It has been recognised by all donors

from the World Bank to the OECD studies, that reforms without ownership have

proved to be unsustainable.

his failure to address the structural sources of poverty and the compulsion to Tadhere to the macro-economic policy model associated with the World Bank's

structural adjustment reforms (SAR) has now been internalised in the Poverty

Reduction Strategy Papers (PRSP) adapted by Bangladesh, Nepal, Pakistan and Sri

Lanka, under pressure from the World Bank and IMF. This design failure in the

PRSPs reflects the weak ownership of the South Asian governments over the current

new policy fashion of the donors. It would thus appear that the newthink on aid and

its manifestation in the PRSP process has not really resolved the tension between the

flawed policy design of the original structural adjustment reforms model and the

Bank's new commitment to putting poverty and governance first. The World Bank has

in fact not succeeded in developing a coherent macro-model which links such reforms

with the process of poverty eradication. Nor is there any indication that policy

ownership in the DCs is being more actively promoted rather than talked about. This

weakness in the PRSP process has now intruded into the report of the Independent

South Asian Commission on Poverty Alleviation (ISACPA) which was approved by the

SAARC Summit in Islamabad in January 2004. This report is a useful document but is

essentially astructural in its conception and is thus likely to have a minimal impact on

poverty in South Asia.

ll such arguments about the counter-productive nature of donor driven policy Areforms have been part of the critique of foreign aid and external dependence for

at least two decades and particularly during the high tide of adjustment reforms in the

1980s. For the academics, NGOs and some political parties who had been challenging

the donor driven reform process of the 1980s, it is welcome news that the World

Bank has seen the light. Empirical research is now deployed by the Bank to

demonstrate that lack of policy ownership contributes to the failure of reforms. They

could have learnt as much by a careful reading of writings on the subject published in

the 1980s.

A South Asian PerspectiveSound economic policiesThe available evidence from South Asia indicates that by the standards set by the

World Bank, the region's policy regimes remains reasonably sound. Between 1997-

2003, the South Asian countries had, by DC standards, lower fiscal deficit/GDP ratios

which on average remained below 10 per cent. The deficits, in South Asia, where they

persisted, were designed to accomodate inflows of aid. These budget deficits were not

the result of governmental extravagance but part of a structural problem originating

in the process of aid dependency. To draw any conclusion, at least within South Asia,

about the relative policy merits of the fiscal deficit/GDP ratio would thus appear to be

misleading. All South Asian countries have, again by global DC standards, enjoyed

23 24


s far as a comparative assessment of bureaucratic quality is concerned, it is not

clear what measures are used for this by the Bank. Again, it would be difficult to Aargue that India or Sri Lanka's bureaucracy is less competent than that of Thailand,

Indonesia, China or Vietnam as to qualifications, systems of recruitment and career

advancement. Bureaucratic quality thus appears to be measured by economic

performance and can hardly serve as an explanatory variable for this economic

performance. It could thus be argued that the South Asian bureaucracy, compared to

that in Francofone Africa, may, on anecdotal evidence, look more meritorious but

within South Asia the application of these measures in assessing economic

performance would need to be much more sensitively analysed to permit for any

conclusions to be drawn.

The East Asian crisis of 1997 suggested that many of the features of weak governance

once associated with South Asia such as corruption, crony-ism, political patronisation,

lack of transparency, lack of rule of law, personalised regulatory practices, were in

existence in East Asia and are only today being identified as explanations for their

financial crisis. But these flaws in governance were also present in the East Asian

system during its miracle phase when few donors sought to highlight these as

constraints to their economic performance. It would thus appear that whilst the

World Bank's position on the value of sound governance appears to be intuitively

acceptable more robust evidence, within Asia at least, needs to be generated before we

can use these measures as a yardstick for guiding aid policy.

The follow up arguments posed by the World Bank for reducing poverty thus also

need to rest on more robust evidence establishing the causal link between sound

economic management and policy success. Unfortunately, the conceptual link

between governance and economic performance remains far from clear. In these

circumstances, the recommendation that aid be targetted to low income countries

with sound economic management appears to be sensible in principle but difficult to

operationalise. Obviously China has fared much better than India whilst Vietnam has

done better than Bangladesh in reducing poverty. But whether this owes to their

policy and allocative priorities, their better economic management or stronger

political commitment, remains again open to debate.

he World Bank study made the sensible point that experience shows that donor Tfinancing with strong conditionally but without strong domestic leadership and

political support has generally failed to produce lasting change. This statement

could certainly be written as an epitaph on the era of conditional aid offered to South

Asia (excluding India). There is no evidence that any of these countries made strong

political commitments to economic reforms or sought to build a political constituency

behind their economic reforms. Even in India the strong commitment demonstrated

by Dr. Manmohan Singh to economic reforms, when he took over as Finance Minister

in 1991, was not fully endorsed by his Cabinet colleagues in the ruling Congress Party.

Thus, the pace of his particular reforms visibly decelerated in the second part of the

Congress regime as general elections approached in 1996. The approach of the

successor BJP regime in India has faced its own ebbs and flows. The contestation

26


relatively low rates of inflation, mostly in single digits. Donors could, thus, not fault

the region's policymakers on monetary profligacy.

rade openness as a measure of policy, has also shown considerable improvement Tin South Asia, though the region still has some way to go to match the East and

South East Asian experience. It is argued that the extent of openness in East Asia is

open to question. The covert protectionism practiced by Republic of Korea in the

dynamic phase of its growth persisted until well into the 1980s and continues to be

practiced today in Japan. It is argued that a policy of domestic protection appears to

have co-existed with considerable policy support for exports throughout the decades

of high export growth in several East Asian countries from 1965 to 1985. Many of

these export promotion measures through the 1960s and 1970s were not very

consistent with the tenets of economic liberalisation and would be deemed today as

unacceptable by the WTO. Even the South East Asians protected some key parts of

their economy and nurtured these for entry into the export market, as for example the

case of the Proton car in Malaysia. China and Vietnam, who have been enjoying high

rates of GDP and export growth over the last 15 years, for all their reforms, remain

even today the most protected economies in South Asia.

Conversely, Bangladesh, Sri Lanka and Nepal's opening up of the economy has not yet

yielded the benefits promised by economic reformers. These arguments could be

applied even more strongly to Sub-Saharan Africa (SSA) where many countries have

liberalised their import regimes at the cost of a deterioration in domestic industry and

the ushering in of a process of de-industrialisation. It is thus arguable that open

economic policies may be a necessary, but far from sufficient, condition to stimulate

growth. The correlation between policy and outcomes needs to be made country

specific if we are to draw any policy conclusions as has been the practise in the World

Bank's report on Assessing Aid.

Measures of institutional qualityThe link between institutional quality and growth in South Asia is far more

problematic. Measuring the strength of the rule of law is as difficult as the

comparative measure of corruption, introduced by Transparency International (TI). It

is thus difficult to assess whether, for example, the rule of law in Thailand was better

established than in Bangladesh or Pakistan, in order to explain their consistently

higher growth rates. No doubt what passes for the rule of law was more in evidence in

India than in Zaire. But for this proposition to hold good it must also explain

differential performance within South Asia itself.

s far as corruption is concerned, there is no evidence at hand which would Aindicate that Indonesia was more or less corrupt than Bangladesh or Pakistan.

Indeed countries such as Bangladesh, Pakistan and Nepal, which rank quite

unfavourably in the lists of Transparency International, have on average performed

better in the last 5 years than many developing countries (DCs). It is by no means

conclusive from the evidence provided by Transparency International that South Asia

is conspicuously more corrupt than Sub-Saharan Africa or even Indonesia.

25


between reform minded cabinet members such as their successive finance ministers

or the minister in charge of privatisation and the more swadeshi school of thought

remains unresolved.

Using aid to promote good governanceThe Bank's recommendation to direct aid to countries with a strong track record of

concrete performance behind domestically initiated reform would thus again favour

China and Vietnam over Bangladesh or Nepal. The Bank's recipe for dealing with

countries with poor policies and no credible reform movement suggests a patient role

of disseminating ideas, transmitting experiences of other countries, training future

policymakers and leaders. This again is a paradoxical position. Poor policies and a

credible reform movements defined by the Bank's yardstick could exclude China and

Vietnam but include Sri Lanka or even Nepal who were very faithful adherents to

structural adjustment reforms. Their poor outcome may thus originate in weak

implementation. This has enabled the Bank to now pass on the responsibility of poor

performance in South Asia not to any design flaw in the structural adjustment reforms

but to poor governance which remains the responsibility of the host government.

Endogenising policy reformsOnce the Bank and other donors embrace the proposition that reforms depend mainly

on domestic political and social factors, the donors have to come to terms with the

limited influence they can exercise over domestic policy agendas in South Asia. In the

wake of this renovation in the Bank's approach to policy reforms, conditional lending

would need to be phased out. The Bank again recognises that conditionality is

unlikely to bring lasting reform if there is no strong domestic movement for change.

Thus, only when domestic constituencies are committed to reform, adjustment loans

and foreign aid can help consolidate policy gains. In such a context the donors can

and indeed should do no more than suggest to the concerned governments that they

need to get their act together, design reforms and commit themselves to the

implementation of these reforms. Out of this reform process the need for aid can be

articulated in a variety of areas from Technical Assistance (TA), to budget and balance

of payments support offered for a finite period whilst revenue and export earnings

capacities are built up.

hroughout South Asia, with perhaps the exception of Bhutan and Maldives, there Tis no country which lacks the domestic capacity to design its own reforms. This

capacity must be mature enough to recognise where skill and knowledge gaps exist so

that donor resources can be solicited to fund the necessary Technical Assistance. India

has exercised ownership over their reforms and have articulated their own need for

Technical Assistance which has, as a result, been much more effectively used than was

the case of Technical Assistance imposed from without upon Bangladesh or Nepal. If

donors are to recognise the need for policy ownership and the role of civil society in

promoting this ownership there is not a great deal that they can do except react to

such local initiatives.

onors have, for too long, attempted to lead reforms. This often follows in the

wake of slow progress by a country in designing its own policy reforms. The DWorld Bank or UNDP tend to lose patience with such tardiness and prefer to call in

expatriate consultants but with a facade of local participation added on. Donors thus

also need patience and self-discipline. They should not make the mistake of

promoting ownership which would itself be a contradiction in terms.

The circumstances governing the assumption of local ownership will vary from region

to region. South Asia is a region with the strongest potential for assuming ownership

over its policy agendas. It has a longer democratic tradition than many other regimes

but its roots constantly need fertilisation since persistent malgovernance endangers

democratic institutions in most countries of the region. In India, Pakistan,

Bangladesh, Nepal and Sri Lanka free elections have ended in periodic regime

changes. But the working of parliamentary institutions leaves much to be desired and

the recent lapse into authoritarian rule in Pakistan, Nepal and even Sri Lanka points

to the shallowness of these roots. The press is relatively free and lends itself to

extracting transparency from the government of the day. However long exposure to

autocracy and a tradition of bureaucratic concealment leaves much scope for making

public affairs more transparent. Both accountability and transparency need, however,

to be extended to the private sector which tends to conceal a variety of misdeeds

which are not exposed to the public or penalised in the market place because of their

collusive association with the state and the imperfections of the market.

The role of civil societySouth Asia also has a highly pro-active civil society manifest not just in the profusion

and quality of its NGOs, some of which are world famous, but in the growth of civic

activism. Its professional resources are comparable to any in the Third World so that

its capacity to design its own reform agendas waits on the will of the governments of

South Asia to follow India's lead in reducing their dependence on donor advise and

on the part of donors to practise what they preach over policy ownership. South Asia,

outside India, has for two decades been innundated with expensive expatriate TA,

usually of poor quality and with negligible use value due to lack of ownership.

he role of aid in moving South Asia towards better governance is thus likely to be

minimal since in most of Asia, donors lack the leverage to do this. This has not Tprevented them from trying to influence not just economic policy but the promotion

of transparency and even free elections in a variety of countries. In such a process,

faced by recalcitrant governments, donors have sought to go over the head of

governments to deal with civil society. Unfortunately civil society itself is an elusive

concept. Donors, in search of civil society in South Asia, have often been tempted to

use their aid to fabricate a civil society by using NGOs as a surrogate for civil society.

This donor approach to building civil society through NGOs creates new channels of

dependency manifest in the plethora of NGOs throughout South Asia whose

institutional existence and the livelihood of hundreds of thousands of their employees

now depends on foreign aid. In South Asia, when the dependence of the state on aid to

underwrite its activities has been in visible decline over the last decade, the external

27 28


the World Bank who became the ideological mentor of these odious regimes. In this

environment of tolerance for autocratic rulers, donors also tolerated conspicuous

violations of human rights as well as pervasive corruption and misgovernance in the

then mistaken belief that following the economic advise of the donors would yield the

prosperity which would serve as a solvent for undemocratic rule. Appeals by civic

organisations to the donors to exercise their influence on the donors to improve their

human rights record often went unheeded.

he problem with moves to politicise aid flow and use it in the service of ideology, Tlies in the inconsistency with which such principles are applied. With the end of

the cold war, the presumption that aid donors have moved toward a less opportunistic

perspective on aid to South Asia is belied by the passage of events after 9/11. Aid, debt

rescheduling and even promise of trade consessions, were used as bait to induce

Pakistan to become a strategic partner in the U.S. backed military assault on

Afghanistan and to support counter-insurgency operations against the Taliban in the

post-war period. Similar inducements by the U.S. and even EU have been offered to

other South Asian countries to fall in line, but their strategic relevance has not been as

strong as for Pakistan so no strong inducements could be offered to these 'lesser'

South Asian countries. What has been notable in the case of Pakistan has been the

willingness of both the World Bank and IMF to fall in line with U.S. strategic agendas

and to accordingly upgrade their valuation of Pakistan's performance and back it with

increased resource commitment. If aid as an instrument for promoting democracy is

applied entirely on pragmatic considerations so that it does not disturb commercial or

strategic relations it loses much of its value. No principle appears to underwrite such

an aid policy beyond the scope for political or economic leverage and the presence or

absence of a strategic and economic stake in a particular country.

In the prevailing circumstances, at least within South Asia, a system of donor driven

political reforms is not likely to prevail in those countries who cannot be pressured.

Those who can be pressured, such as Pakistan, thus feel unfairly treated and

encourage the accumulation of massive popular resentment at the injustices inherent

in donor policy. Such inconsistency and even hypocrisy inherent in donor practice, if

not pronouncements on using aid in the service of democracy, can often assume

regime threatening proportions. Genuflecting to donor political pressures could

expose a regime to democratic upheaval and even overthrow.

Towards Policy OwnershipAvailable capacities for self-relianceWhat is the eventual scope for reforming aid policy in South Asia?. All countries in

South Asia are now less dependent on aid than they were a decade ago. Today, these

countries prioritise improved market access to the U.S., EU and Japanese market over

their demand for aid. Thus, these countries can afford to take more autonomous

positions in their relations with aid donors. Donors should recognise that their

leverage to influence domestic policy in South Asia is less than it used to be. But this

awareness also needs to be induced among South Asia's policymakers who in most

countries of the region conduct themselves as if they were living in the donor-

30


dependence of the NGOs has expanded exponentially. This escalation in aid

dependence of most of the NGOs raises serious problems for their sustainability since,

unlike the state, very few NGOs have shown any capacity for weaning themselves from

aid. Furthermore most such NGOs suffer from their own problems of accountability

and transparency.

he availability of aid to underwrite the salaries of large numbers of grassroots TNGO workers is paradoxically reducing the scope and impact of political parties

active at the grassroots level who remain committed to the cause of the dispossessed.

Similarly, many civic organisations committed to uphold the rights of the poor as an

act of vocation are finding it difficult to sustain themselves. Many of these forces are

losing their cadres to the NGOs and the very act of civic engagement is now being

undermined by aid which promises salaries, offices and even Pajeros to those who

once embraced a life of sacrifice and austerity to demonstrate their solidarity with the

poor. In these circumstances, the agenda of progressive minded donors anxious to

introduce democracy, human rights and the building of civil society into aid agendas,

is fraught with hazard. Such donor-backed civic activism not only undermines

sponteneous acts of civic mobilisation but reduces their credibility as these are seen to

be inspired from outside.

Donor driven democratic governanceIn South Asia, donors continue to exercise a degree of political leverage. Bangladesh,

Pakistan, Sri Lanka and Nepal are sufficiently dependent on aid, even today, to expose

themselves to considerable pressure from donors in the area of human rights and

democratic governance. Whilst this dependence on aid, in quantitative terms, has

visibily declined in all these countries over the last 15 years, the dependence on policy

advise from donors remains strong. The psychology of dependence on donors has

become ingrained in the psyche of political and bureaucratic decision-makers and

even the military who remain firmly convinced, even today, that their donors hold

their political lifeline in their hands.

n South Asia, under the prevailing circumstances, we have observed that during the Ihightide of their dependence on aid, military regimes have ruled Pakistan from

1958-1971, 1977-1988 and from 1999 to the present, Bangladesh from, 1975 to 1979

and from 1982-89, and an autocratic monarch ruled Nepal for most of its recent

history. The responsibility of the donors is not insignificant in perpetuating such

autocratic rule over this long period in South Asia and indeed in much of Africa and

Latin America. So great was the dependence of many of these countries on aid during

this earlier period that a collective decision by the principal donors to withhold aid to

any of these countries, until free and fair elections, under international supervision,

were held and a plural political system established, would have elicited instant

compliance. Instead aid donors underwrote these autocracies, lavished them with

economic aid and in the case of Pakistan, with military aid and thereby contributed to

the destruction of democracy in these countries. In each of these countries the

autocratic rulers curried favour with the donors by both serving their strategic

agendas and uncritically accepting their policy advise, usually communicated through

29


dominated environment of the 1980s.

n this changed context of reduced aid dependence and taking lessons from the era Iof 'disowned' aid, donors should recognise that most countries of South Asia

should be left to design their own policy agendas and articulate their felt needs for aid.

Most South Asian countries can call on the services of local professional resources,

have the institutional base, political capacity and an active civil society to assume

ownership over their own destiny. Donors should thus resist the temptation of

tantalising hesitant South Asian regimes with offers of aid to embrace donor agendas

whether for structural adjustment reforms or even for alleviating poverty and

promoting human development. These are societies which are mature enough to

decide what they want and what price they will pay for this. Donors remain at liberty

to direct their aid to regimes which will target poverty and human development or

even liberalise their trade regime. It should, however, not drive these countries

towards such agendas whereby they have little commitment or capacity to implement

them and embrace such policies largely in order to access fungible aid resources.

Autonomy in policy designIn South Asia, every demand for aid or Technical Assistance should thus originate

within the concerned country. They could prioritise their development agendas,

design policies and programmes to realise these agendas by assuming responsibility

for project preparation. They should in the process be able to articulate their need for

technical and programme assistance. Such programmes should be underwritten by

macro and sectoral policies which should articulate the need for aid at the macro and

project level and define its form as to project or programme financing. The recipients

should manage all such aided projects and assume full responsibility for coordinating

aid. The era of the World Bank or UNDP led donor consortium or aid group should be

formally terminated. All such mechanisms of aid coordination through meetings

between government and donors should be located within and chaired by the host

country. Ideally the recipient government should include the political opposition and

civil society organisations in its consultative process for designing policies and as

participants in the aid group meeting but this proposition would depend upon the

maturity of the democratic culture in a country.

nder such a transformed dispensation, donors should resist the temptation to Uprepare grey cover reports on policy reform, design projects or bring in

consultants to design the TOR of a Technical Assistance project. Donors should retain

their right to evaluate government proposals rather than substitute their own policy

intervention. Where such proposals appear credible they should support the

initiatives. Where there are policy disagreements, ideally donors should give the

government the chance to implement it own policy provided that it is soundly

designed and enjoys domestic political support even if it varies from a donor's notion

of policy correctness (PC). If the policy fails, donors may either seek a policy change

closer to what donors deem to be PC or they may withdraw aid and let the country

finance its own `follies'. However even where a particular donor decides that a policy

is inappropriate and thus, chooses to withhold aid, there should be some scope for a

free market amongst donors, where the government can sell its policy to another

donor. In an open market for ideas the principal donors should not assume

hegemonic postures in setting the policy agenda where all donors are expected to

coordinate their strategy towards a particular country under the umbrella of the

World Bank or UNDP.

aving recognised the importance of conceding ownership over policy in South HAsia, the donors- particularly the U.S. and the EU- should not seek to establish

new routes to policy influence by using the issue of market access as a means to gain

strategic advantage in South Asia. Now that South Asia is more trade than aid

dependent, this would introduce new distortions in Advanced Industrial Countries

(AIC)-South Asian relations which would open up an even more disturbing hegemony

over the policy autonomy of South Asia where even India would not be immune.

The primacy of ownershipThe argument in this paper emphasising the recapture of policy ownership in South

Asia is premised on the belief, based on three decades of experience, that unless

countries assume responsibility for their own destiny and commit themselves to

transform the lives of their most deprived citizens, no policy reform or economic

transformation is feasible and no donor can impose this on a country however weak

they may be. This hypothesis remains a viable basis for aid policy in most South Asian

countries because they have the capacity to take charge of their own affairs. Even

though this principal has universal applicability one cannot speak with a similar

degree of conviction about other regions whose capacity to assume charge of their

own future needs to be ascertained after careful analysis.

(Professor Rehman Sobhan is currently the Chairman of Centre for Policy Dialogue

(CPD), Bangladesh and Executive Director, South Asia Centre for Policy Studies

[SACEPS]).

31 32


l

Forces', The International Journal of Technical Cooperation, (London: Frank Cass, 1995)

vol. 1, no.1.lRehman Sobhan, 'Official Development Finance for National Development of the Least

Development Countries', Journal of International Affairs, 4 July, 1996.lRehman Sobhan, Aid Dependence and Donor Policy: The Case of Tanzania: with Lessons

from Bangladesh Experience, ( Dhaka: University Press Ltd., 1996b).lRehman Sobhan, Towards a Theory of Governance and Development: Learning from

East Asia, (Dhaka: University Press Ltd., 1998).lRehman Sobhan, 'Bangladesh's Experience with Economic Reforms: The Need for a

Reappraisal', ed. Fumiko Oshikawa, (Osaka: Japan Center for Area Studies, 1999).lRehman Sobhan, The Future of Development Assistance: An Asian Perspective, under

publication by Office of Policy Studies, (New York: UNDP, 1999).lRehman Sobhan, 'Eradicating Rural Poverty: Moving from a Micro to a Macro Policy

Agenda', IFAD/FAO, WFP, Public Lecture, Rome, 2001.lUNCTAD, The Least Developed Countries 2000 Report, (United Nations, 2000).lUNDP, Human Development Report 2003, (New York: UNDP, 2003).lRobert Wade, Governing the Market, (Cambridge: Cambridge University Press, 1990).lWorld Bank, Assessing Aid: What Works, What Doesn't and Why, (Oxford University

Press, 1998).lWorld Bank, World Development Report 2000/2001. Attacking Poverty, the World Bank,

(Oxford University Press, 2000/2001).lWorld Bank, World Development Report 2002. Building Institutions for Markets, World

Bank, (Oxford University Press, 2002).

Rehman Sobhan, 'Technical Assistance to Developing Countries: The Failure of Market

34

Table I External Resource Flows to South Asia

Official Development Assistance (ODA) Received a

Total ODA

(Millions of US dollars)

Per Capita ODA

(dollars)

ODA as % of

GDP

Net Foreign Private

flows

(as % of GDP) b, c

1980 1990 2001 1990 2001 1990 2001 1990 2001

Bangladesh 1,282 2,103 1,023.9 19.7 7.3 7.0 2.2 0.2 0.7

Bhutan 8 47 59.2 32.7 27.9 16.5 11.1 - 0.3 0.0

India 2,147 1,586 1,705.4 1.9 1.7 0.4 0.4 0.6 0.7

Maldives 25.0 83.2 9.8 4.3 3.1 2.1

Nepal 163 429 388.1 22.7 16.1 11.7 7.0 - 0.2 0.3

Pakistan 1,130 1,152 1,938.2 10.3 13.2 2.8 3.3 0.4 - 0.5

Sri Lanka 390 665 330.2 39.1 17.6 9.1 2.1 0.6 1.5

Total South

Asia

5,120 6,174 6,032.1 5.4 4.2 1.1 0.8 0.3 0.7

South Asia

as % of Total

ODA to

World

18.50 12.58 11.73 - - - - - -

Note: a: ODA reorganisations and Arab countries as well as Estonia and Israel. Aggregates do not include net official aid.b: A negative value indicates that the capital flowing out of the country exceeds that flowing in.c: Private flows combine non-debt-creating portfolio equity investment flows, portfolio debt flows and bank and trade-related lending.

ceipts are total net ODA flows from DAC countries, other OECD countries, multilateral

Source: World Bank World Development Repot 1988 Oxford University Press, New York

World Bank World development Report 1992 Oxford University Press, New York

UNDP Human Development Repot, 2003 Oxford University Press, New York


Bibliographyl

Oxford University Press, 1969).lCommission on the Role of MDBs in Emerging Markets, Report on the Role of the

Multilateral Development Banks in Emerging Market Economies, Washington D.C, 2001.lDavid Hulme and Paul Mosley, Finance Against Poverty , 2 vols. (London: Routledge,

1996).lParvez Hasan, Pakistan's Economy at the Crossroads, (Karachi: Oxford University

Press,1998).lIndependent South Asia Commission on Poverty Alleviation, Our Future Our

Responsibility: Road Map Towards a Poverty Free Asia, (Kathmandu: SAARC

Secretariat, 2003).lK.S. Jomo (ed.), Tigers in Trouble, (London: Zed Books Ltd, 1998).lOECD, Policy Guidelines on Poverty Reduction, (Paris: OECD, 2001).lRIS, South Asia Development and Cooperation Report, (New Delhi: RIS, 2004).lRehman Sobhan, The Crisis of External Dependence, The Political Economy of Foreign

Aid, (London: Zed Press, , 1982 and Dhaka: University Press, 1984).lRehman Sobhan, From Aid Dependence to Self-Reliance: Development Options for

Bangladesh, (Dhaka: University Press Ltd, 1990). lRehman Sobhan, Bangladesh: Problems of Governance, (India: Konark Publishers Pvt.

Ltd., 1993a).lRehman Sobhan (1994), 'Aid Versus Markets in the Institutionalization of Consultancy

Service: Some Asian Contrasts', Asia-Pacific Development Journal, (Bangkok, 1994) vol.

no. 1.

Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, (New York:

33


Neo-liberal ReformsJayati Ghosh

ost of the economies of South Asia, especially India's, are often portrayed in

comparative discussion as among the 'success stories' of the developing world Min the period since the early 1990s. The sense that the Indian economy performed

relatively well during this period may simply reflect the much more depressing or

chaotic experiences in the rest of the developing world, with the spectacular financial

crises in several of the most important and hitherto dynamic late industrialisers in

East Asia and Latin America, and the continuing stagnation or even decline in much

of the rest of the South. Compared to this, the Indian economy, along with the smaller

economies in the region, was relatively stable and has been spared the type of extreme

crisis that became almost a typical feature of emerging markets elsewhere.

Nevertheless, the picture of improved performance is misleading at many levels, since

in fact both India and the entire South Asian region as a whole, experienced economic

growth which was less impressive than the preceding decade. Further, across the

region this growth was marked by low employment generation, greater income

inequality and the persistence of poverty. In other words, despite some apparent

successes in certain sectors, on the whole the process of global economic integration

did little to cause a dramatic improvement in the material conditions of most of the

population, and added to the greater vulnerability and insecurity of the economies in

the region.

The countries of South Asia have strange relationships with one another. There is, of

course, the uneasy and periodically violent interaction between India and Pakistan.

There is the more complex attitude of all the smaller countries vis-à-vis India, along

with the Indian government's own implicit perception of itself as the sub-regional

power and Big Brother. There are the tentative and inchoate attempts of the various

smaller countries to forge relationships with each other, overcoming histories of

mistrust or alienation.

n all this, one widespread perception in the region is that each country is very

different from all the others, not only in politics, history, culture and society, but Ialso in economic structure and trajectory. But this perception is actually false, as even

the most cursory investigation into economic processes in the region will reveal. It

turns out that the very disparate countries of the region, which differ in size, resource

endowment, particular social and political configurations, and patterns of constraints,

nevertheless have a remarkable commonality of economic experience.

Thus, all of these economies share certain structural characteristics. These include:

the presence of a high degree of underemployment; a strong dualism between

organised and unorganised sectors, especially in manufacturing, which sometimes

(but not always) translates into the dualism between large-scale and small-scale; the

continuing significance of agriculture as a major employer; the emergence of services

as the largest employers, often as a refuge sector; the involvement of by far the larger

share of the workforce in what is essentially low productivity employment.

But in addition to these, what is more noteworthy is the apparent synchronicity of

policies and processes across the region, despite very differing social and political

pressures. All the economies of the region had import-substituting industrialisation

strategies for the first few decades after independence, with the attendant

development of some industry and associated dualism in the economy, as well as

regulation of much economic activity.

rom the 1980s onwards, all of them moved, to varying degrees, to a strategy of Fdevelopment based on export-orientation, liberalisation and privatisation based

on the market-oriented neo-liberal economic paradigm. The process could be said to

have started in South Asia with the Sri Lankan government of Jayawardene moving

towards liberalisation and dismantling the earlier universal food security system, in

the late 1970s and early 1980s.

Subsequently, and more strongly in the early 1990s, all the governments in the region

(barring that of Nepal, which had a different situation) went through fairly

comprehensive policies of internal and external liberalisation, reduction of direct state

responsibility for a range of goods and services and privatisation. While we in India

may perceive specificity in our own reforms, there was still a remarkable degree of

similarity even in the design and pattern of these neoliberal economic strategies

across the region.

y the turn of the 21st century, most of the important economies in South Asia had Bundergone the following changes:

?very substantial reduction in direct state control in terms of administered prices,

regulation of economic activity,

?privatisation of state assets, often in controversial circumstances,

?rationalisation (usually also a euphemism for reduction) of direct and indirect tax

rates, which became associated with declining tax-GDP ratios,

?attempts (typically unsuccessful) to reduce fiscal deficits which usually involved

cutting back on public productive investment as well as certain types of social

expenditure, reducing subsidies to farmers and increasing user charges for public

services and utilities,

?trade liberalisation, involving shifts from quantitative restrictions to tariffs and

typically sharp reductions in the average rate of tariff protection,

?financial liberalisation involving reductions in directed credit, freeing of interest

rate ceilings and other measures which raised the cost of borrowing, including for

the government,

?moving to market determined exchange rates and liberalisation of current account

transactions,

35 36


hese patterns of growth and employment observed in the different economies of

South Asia since the early 1990s, call into question the arguments advanced by Tthe advocates of neo-liberal reform, that there is a direct link between such reform

and economic growth. Such a link tends to be based on the premises that both

internal deregulation and external liberalisation spur private investment, that curbing

public investment is beneficial for aggregate growth because otherwise it tends to

'crowd out' private investment, that privatisation delivers assets to those who are

likely to make socially more desirable use of them, and that private agents acting on

their own will deliver both more efficient and more dynamic outcomes.

This optimistic perception ignores the widespread evidence of market failure, at both

microeconomic and macroeconomic levels, as well as the strong evidence of close

positive links between public and private investment. There are obvious reasons why

such an argument therefore would not hold over either short run or longer run time

horizons, especially in developing economies such as those in South Asia.

Given the unequal asset and income distribution that exist and the consequent limited

nature of the home market, private investment would come up against a demand

constraint fairly rapidly. This would be aggravated when the type of private

investment that occurs does not generate that much employment, as is likely when the

investment is in sectors catering to richer consumers with production involving high

import content or more capital-intensive technology.

ublic investment in developing countries tends to have strong positive linkages

with private investment, not only because of the standard Keynesian mechanism, Pbut because it also operates to ease infrastructure and other supply constraints,

making private production easier and cheaper. Therefore, a strategy based on

reducing public investment and hoping for deregulated private investment to fill the

gap, could well be expected to generate lower aggregate investment and growth

trajectories than one which allows for an important role for public investment.

This argument is actually borne out by the experience of almost all the countries of

South Asia that have been briefly discussed above. As we have seen, by the turn of the

decade, governments in the region had already achieved major liberalisation and

deregulation in many important areas of the economy.

Thus, internal and external trade were almost completely liberalised in all the

countries of the region by 2001. Domestic deregulation especially for large capital

was extensive and provided much greater freedom to private investors in general.

Attempts to control the fiscal deficit in order to prevent 'crowding out' of private

investment meant cuts in government productive expenditure and substantial

reduction in the 'primary deficits' (that is, net of interest payments). Many cases of

privatisation of public assets were pushed through even at rock bottom prices.

Despite all this, if growth still tended to slacken, the problem obviously lay to a

substantial extent with the neoliberal reform process itself. And this was manifested

in the fact that in aggregate terms the reform process did not generate either higher

38


?allowing some degree of capital account liberalisation, including easing rules for

Foreign Direct Investment, allowing non-residents to hold domestic financial

assets and providing easier access to foreign commercial borrowing by domestic

firms.

This commonality of policy experience meant in turn that outcomes were also quite

similar, despite the very different initial conditions in different economies.

irst, the evidence points to increasing inequalities of income in all the economies Fof the region. These growing inequalities are evident in terms of differences

between rural and urban residents; between households in various-size classes of

expenditure; between sub-regions within countries. The widening of income gaps has

also in some cases been associated with increased social and political tensions in the

region, which may be expressed not so much in direct demands for redressal of

income imbalances, but in terms of other ethnic, social, cultural or regional demands.

Second, across all the countries in the region there has been deceleration of

employment generation, compared to previous periods. This has occurred despite a

slight improvement, or at least the same trend level, of growth in aggregate economic

activity. In all the countries in South Asia, employment generation has not kept pace

with the increase in population, and in several countries (such as India and Pakistan,

for example) this has expressed itself not only in higher rates of unemployment and

underemployment, but also in declining labour force participation, which is not fully

explained by increased involvement in education.

Third, in most of the countries in the region, there has been stagnation or increase in

levels of poverty as defined by the head count ratio. India is the only country where

the data are ambiguous on this matter, but even here, plausible estimates suggest that

while poverty has declined somewhat over this period, the rate of decline has reduced

compared to the earlier periods. Such evidence on poverty across the region is broadly

in conformity with the evidence on widening inequality and decelerating employment

that has already been mentioned.

ourth, the relative decline of manufacturing, especially in the small scale sector, Fand the stagnation or decline of manufacturing employment, is marked across the

region, with the exception of Sri Lanka. In different countries of the region,

agriculture and or services appear to have become residual refuge sectors for workers

who cannot find productive employment in industry; in India, however, even

agricultural employment has declined. Across the region, there appears to be

relatively little link between rates of aggregate economic growth and total

employment generation in the recent past.

Fifth, in all countries of the region the quality of employment appears to have

deteriorated, with an increase in casual and part-time work, as well as greater fragility

of contracts and indications that day labourers find fewer days of work. Real wage

rates have typically stagnated in most countries; certainly wage share of income has

declined in all countries.

37


rates of investment in the aggregate or increases in the productivity of such

investment.

n India, the rate of growth of aggregate GDP in constant prices has been between I5.5 per cent and 5.8 per cent in each five-year period since 1980, and the process of

accelerated liberalisation of trade and capital markets did not lead to any change from

this overall pattern. Indeed, recent years have witnessed a decline in average GDP

growth rates to less than 5 per cent per annum. More significantly, the period since

1990 has been marked by very low rates of employment generation. Rural

employment in the period 1993-94 to 1999-2000 grew at the very low annual rate of

less than 0.6 per cent per annum, lower than any previous period in post-

Independence history, and well below (only one-third) the rate of growth of rural

population. Urban employment growth, at 2.3 per cent per annum, was also well 1below that of earlier periods, and employment in the formal sector stagnated . There

has been, for the past two years, a severe crisis in the agriculture sector, as cultivators

have been hit by the threat of import competition from highly subsidised imports,

which have kept prices low, even as they struggle to cope with higher costs because of

cuts in domestic input subsidies.

Other indicators point to disturbing changes in patterns of consumption. Thus, per

capita foodgrain consumption declined from 476 grams per day in 1990 to only 418 2grams per day in 2001 . The National Sample Survey data also suggest that even

aggregate calorific consumption per capita declined from just over 2200 calories per

day in 1987-88 to around 2150 in 1999-2000. Given the aggregate growth rates and

the evidence of improved lifestyles among a minority, this points to substantially 3worsening income distribution, which is also confirmed by national survey data .

Meanwhile, declining capital expenditure by the government has been associated with

more infrastructural bottlenecks and worsening provision of basic public services. All

these features: decelerating employment growth, declining access to food for ordinary

people, and worsening coverage and quality of public services, have had particular

impact upon the condition of ordinary women.

he major positive feature which is frequently cited, that of the overall stability of Tthe growth process compared to the boom-and-bust cycles in other emerging

markets, reflects the relatively limited extent of capital account liberalisation over

much of the period, and the fact that the Indian economy was never really chosen as a

favourite of international financial markets over this period. In other words, because

it did not receive large inflows of speculative capital, it did not suffer from large

outflows either. Meanwhile, stability to the balance of payments was imparted by the

substantial inflows of workers' remittances from temporary migrant workers in the

Gulf and other regions. This has amounted for more than all forms of capital inflow

put together.

While the Indian experience of the recent past is not reflective of the impact of

external debt, it does indicate one crucial aspect of the explicit policy of wanting to

attract capital inflows of all forms into the economy. While the actual inflows have not

amounted to much, the apparent desire to attract and maintain such inflows has led

to significant constraints on government policy. In particular, there have been (self-

imposed) limits on fiscal expansion. This has had unfortunate implications, especially

in the past two years, which have involved hardly any increases in the state's

productive expenditure, despite domestic recession, unemployment, crisis in

agriculture, and clear signs of slack in the form of high surplus holdings of food grain

and large foreign exchange reserves.

In other countries of the South Asian region, the economic growth experience

subsequent to liberalisation has generally been even less impressive. In Pakistan,

average annual growth rates plummeted in the 1990s, compared to the earlier decade,

by about one-third. The deceleration in growth was associated with historically low

rates of investment, as private investment failed to pick up and counterbalance the

decline in public spending.

Industrial growth rates almost halved from 8.2 per cent to 4.8 per cent per annum.

The earlier success at reducing poverty was reversed in the 1990s, as the per cent of

households living in absolute poverty increased from 21.4 per cent in 1990-91 to 32

per cent in 2000-01. By June 2001, therefore, 40 million Pakistanis were living below

the poverty line. Unemployment rose, real wages fell and income distribution

worsened. Human development indicators, which were poor to start with, worsened

over this period. Several analysts have blamed this on the single-minded pursuit of

the government's economic managers to achieve stabilisation targets a la the IMF at

the cost of growth and poverty alleviation.

he past two years have involved even more economic volatility, although here Tmilitary instability in the region, including the U.S.-led war on Afghanistan and

the build-up of troops along the border with India, could have played a role as well.

Recent geopolitics has impacted in different ways upon Pakistan's economy. The

desire of the United States to use Pakistan as an ally has meant the waiver or

rescheduling of some external debt, which provides short-term relief but implies

future problems. However, uncertainty and instability in the region has also meant

falling domestic and external investment.

In Bangladesh, while aggregate growth rates over the 1990s were marginally higher

than in the earlier decade, the overall incidence of poverty (at around 45 per cent of

the population) has been stubbornly resistant to change. Indeed, the rate of poverty

reduction slowed down after 1994-95, because of both lower growth of production and

lower employment generation. Industrial growth was positively affected by the

expansion of the export-oriented textile sector (taking advantage of previously

unutilised MFA quotas) in which most workers are young women involved at the

lowest end of a global manufacturing chain. But other than textiles and garments,

most manufacturing sectors have stagnated or declined. Such employment growth as

there has been has occurred in agriculture and services sectors, mostly in informal

activities. Industrial employment has been stagnant, and the entrenched dualism in

the labour market continues.

39 40


supporting employment-intensive activities through a range of trade, fiscal and

financial measures. Without such active involvement, aggregate employment in the

region is likely to continue to stagnate, and may even deteriorate with further doses of

neoliberal reform.

f such have been the consequences of the process of global integration, adversely Iaffecting the material circumstances of the large bulk of citizenry in the region,

what has influenced government policy in all these countries to make the neo-liberal

economic strategy so inevitable nonetheless? What was the domestic political and

social support for the process of liberalisation, which made it fit so neatly into the

requirements imposed by international imperialism? Obviously, the political economy

processes involved are complex and vary from country to country. But some idea may

be had from a more detailed consideration of the Indian experience.

One of the interesting features of the political economy of the Indian strategy of

liberalising economic reform has been the initially conditional and subsequently more

unqualified support extended to it by various elements of the large capitalist class and

other social groups which have substantial political voice, such as middle class and

professional groups. To some extent this can be explained by the proliferation and

diversification of the Indian capitalist class that took place during the years of import-

substituting growth and later. There were three factors that led to this. The first was

related to the process of introduction of new products and markets. In India over time

there were a number of areas outside the traditional bases of existing monopolistic

groups, such as trade, finance, services of various kinds and operations abroad by

Non-Resident Indian groups, which served as sites for primary accumulation of

capital.

ver time, groups that had accumulated capital in this fashion sought to diversify Ointo manufacturing, not only by entering new niche markets, but also by

investing in large capacities in industries characterised by economies of scale. This

created a direct challenge for several of the traditional monopolies, which had in the

past been protected by the barriers to entry created by the government's industrial

and trade policies. The new entrants welcomed deregulation and also, because of

newer technology, were less averse to import competition.

Established large capital found its relative position worsening in the economy over

time. To reverse this decline, it looked for new avenues, including expansion abroad

through the export of capital and by moving into areas previously reserved for small-

scale entrepreneurs. So even the established big businesses that were, to start with,

the beneficiary of state controls of various kinds, began to chafe against these controls

at a certain stage. Among certain other sections such as the agricultural capitalists the

economic regime change met with qualified approval, though parts of it were objected

to. Agricultural capitalists, while being hostile to the withdrawal of subsidised inputs

and directed credit, favourably anticipated the prospect of exporting at favourable

prices in the international market.

42


ll the productive sectors in Bangladesh have been adversely affected by trade

liberalisation in India, given the porous border, which allows for the possibility of Asubstantial smuggling. Thus import penetration has adversely affected production and

employment in both agriculture and most manufacturing, and even sectors of rural

economic diversification such as livestock and poultry rearing. Income distribution

worsened over the 1990s.

The economy of Nepal has been similarly affected by Indian trade liberalisation

because of its open border with India. Growth in the productive sectors has been

weak, especially in agriculture where the removal of subsidies was not accompanied

by public investment in rural infrastructure. In Sri Lanka, relatively low growth in the

1990s (especially in the agricultural sector) was associated with high macroeconomic

imbalances, high trade deficits and reduced employment generation. Domestic

political strife and the state of war in the North were only partly responsible for this;

an important role was played by the decline in value of agricultural exports, the

mainstay of Sri Lanka's economy.

Throughout the region, therefore, the process of increased integration with the global

economy was not associated with higher GDP growth or more productive employment

generation, or improved performance in terms of poverty reduction. Rather,

employment possibilities became more fragile and there were clear income

distributional shifts towards increased inequality. In all the countries, the

combination of attempts to impose “fiscal discipline” by cutting public expenditure

resulted in adverse consequences for producers as well as reduced quality and

quantity (in per capita terms) of physical infrastructure and basic public services. The

loss of revenues from import tariffs, the associated necessary declines in domestic

duties, and the need to provide incentives to capital through tax concessions, all led to

declines in tax-GDP ratios across the region, further reducing the spending capacity of

the governments.

All the governments in the region now recognise that employment generation has

been a major failure of the reform process so far. In fact, increasing employment

generation is now the explicit concern in most of recent planning and policy

documents that have been published in the region.

t is strange, however, that while the explicit goal has changed from growth in itself Ito employment generation, the strategies that are supposed to achieve this

essentially involve further doses of neo-liberal marketist reform, rather than policies

that would directly affect employment. Thus, most of the policy statements refer to

further privatisation, further deregulation of domestic economic activity, further

financial liberalisation and external capital account liberalisation, and further

restrictions on fiscal policies.

These are precisely the set of policies that, as observed already, have been associated

with deceleration of employment in the past decade. If employment generation is to

be the focus of the new policy thrust in the region, then it would actually require a

rethinking of these policies, towards more active state intervention in terms of

41


In the event, a substantial section of domestic capital was willing to make

compromises with metropolitan capital on the terms that the latter demanded. It was,

therefore, all for allowing metropolitan capital to capture a share of the Indian market

even at the expense of the entrenched capitalists, not to mention the public sector, in

the hope of being able to better its own prospects as a junior partner, both in the

domestic as well as in the international market. It was thus in favour of import

liberalisation, a full retreat from state interventionism, and accepting the kind of

regime that metropolitan capital generally, and the World Bank and the IMF as its

chief spokesmen, had been demanding.

upport for liberalisation was growing not just among a section of industrial and Sagricultural capital. A whole new category of an altogether different kind of

businessman was coming up, containing those who were more in the nature of

upstarts, international racketeers, fixers, middlemen, often of 'non-resident Indian'

(NRI) origin or having NRI links, often linked to smuggling and the arms trade. Such

private agents in any case did not have much of a production base, and their parasitic

intermediary status as well as the international value of their operations naturally

inclined them towards an 'open economy'. And finally, we should not exclude a

section of the top bureaucracy itself, which had close links with the Fund and the

World Bank, either as ex-employees who might return any time to Washington D.C.,

or through being engaged in dollar projects of various kinds, or as hopeful aspirants

for a lucrative berth in Washington D.C. The weight of this section in the top

bureaucracy had been growing rapidly, and its inclination naturally was in the

direction of the Washington Consensus-style policy regime. Thus, quite apart from the

growing leverage exercised by the international agencies in their capacity as 'donors',

the internal contradictions of the earlier economic policy regime generated increasing

support within the powerful and affluent sections of society for changing this regime

in the manner desired by these agencies.

esides this support from large corporate capital, the large and politically powerful Burban middle classes, along with more prosperous rural farming groups, whose

real incomes increased in the consumption-led boom of the 1980s, actively began to

desire access to international goods and gave potency to the demands for trade

liberalisation. And of course the technological and media revolutions, especially the

growing importance of satellite television, imparted a significant impetus to the

international demonstration effect, which further fuelled liberalising and consumerist

demands.

One important social change, which was arguably influential in creating pressures for

the shift in macroeconomic strategy, was the accelerated globalisation of a section of

Indian society. Apart from the media, one major instrument of this was the postwar

Indian diaspora. The 'NRI phenomenon', by means of which a qualitatively significant

number of people from the Indian elite and middle classes actually became resident

abroad, contributed in no small measure to consumerist demands for opening up the

economy. The importance of Non-Resident Indians was not only because they were

viewed as potentially important sources of capital inflow, but also because of their

close links with (which in many cases made them almost indistinguishable from)

dominant groups within the domestically resident society.

It should be remembered that while the liberalising reforms failed in the aggregative

sense and also in terms of delivering better conditions for most of the Indian

population, there was a definite improvement in material conditions for a substantial

section of the upper and middle classes. Since these groups had a political voice that

was far greater than their share of population, they were able to influence economic

strategy to their own material advantage. It is in this sense that local elites and middle

classes were not only complicit in the process of integration with the global economy,

but active proponents of the process.

hile the neoliberal economic reform programme entailed a changed Wrelationship of government interaction with economy and polity, it was not a

'withdrawal of the state' so much as a change in the character of the association. Thus,

while the state effectively reneged on many of its basic obligations in terms of

providing its citizens access to minimum food, housing, health and education, state

actions remained crucial to the way in which markets functioned and the ability of

capital to pursue its different goals. Government and bureaucracy remained crucial to

economic functioning at the end of the decade of reforms; in fact the overall context

was one of greater centralisation of economic and financial power. Many had believed

that a 'retreat of the state' and the exposure of the economy to the discipline of the

market would cut out arbitrariness of decision-making and the corruption that is

inevitably associated with it. It would streamline the functioning of the economy by

making it a 'rule-governed system', though admittedly the rules of the market. What

happened instead in the Indian economy during this period of neoliberal structural

adjustment was an increase in the level of corruption, cronyism, and arbitrariness to

unprecedented levels. The privatisation exercise became another vehicle of primitive

accumulation by private capital as it acquired public assets cheaply. Precious natural

resources, hitherto kept inside the public sector, were handed over for a pittance (and

alleged 'kickbacks') to private firms with dubious objectives. With the wider

corruption that increasingly pervaded the system, the 'discipline of the market' proved

to be a chimera.

cross the South Asian region, indeed, and not confined only to India, the period Ahas witnessed an increase not only in levels of open corruption but also in a

decline in substantive democracy and acceptance of basic socio-economic rights of

citizens. While the formal denial of democracy has been more limited (as in Pakistan)

across the region, the states have in effect become more centralising and more

authoritarian in certain ways, even as their ability to control events and processes

becomes more tenuous.

It could be argued that the centralised, centralising and increasingly authoritarian

state is in fact a necessary requirement for this type of liberalisation which is based

more on external legitimisation (from foreign financiers and the perceived discipline

of international markets) rather than on internal legitimacy derived from the support

43 44


confront these much more powerful elements, given that they still have the power to

distribute some amount of material largesse, has meant that they could not become

the direct objects of any aggressive vent for frustration. Rather, the outlet was

increasingly found in terms of growing antagonism, increasingly finding violent

expression, towards other categories of people who are nearer home, closer in terms

of lifestyle and more susceptible to such attack. It is worth noting that often these

groups are already the most disadvantaged and materially weak sections of society.

here is a broader international context to this, which is particularly reflective of Tthis phase of imperialist globalisation. Across the world, in both developed and

developing countries, there is a greater tendency on the part of the rulers, and those

who are privileged in society, to ignore the interests of the majority and to blatantly

push for those policies that will only benefit a small minority. The rise of finance

capital and the hugely powerful role played by speculative capital in determining the

fortunes of even large industrial countries has made this even sharper. Increasingly,

governments point to the threat of capital flight as the reason why they cannot

undertake basic measures for the welfare of most of the citizens, since anything that

involves more expenditure for the people is inherently viewed with disfavour by

international capital. Of course, this international tendency then has its counterpart in

each national economy, as particular groups that actually benefit from the process

seek to establish that 'there is no alternative'. Which is why we have the spectacle of

local elites and governments not just advocating, but also able to continue to push

through, policies that are likely to be to the detriment of most of the people. The

situation is neither inevitable nor permanent, however, and the contradictions in the

global system that were outlined earlier mean that even in particular regions, more

progressive forces that will instigate change are likely to surface.

(Jayati Ghosh is professor of Economics at Jawaharlal Nehru University, New Delhi).

End Notes1. The only positive feature in employment patterns was the decline in educated

unemployment, largely related to the expansion of IT-enabled services in metropolitan and

other urban areas. However, while this feature, along with that of software development,

has received much international attention, it is still too insignificant in the aggregate

economy to make much of a dent.2. Of course, it has been argued that this can represent a positive diversification of

consumption away from food grain that is associated with higher living standards. But it is

usually the case that aggregate food grain consumption does not decline because of indirect

consumption of grain (for example, through meat and poultry products that require feed).

In any case, the overall decline in calorific consumption (covering all food products)

suggests that the optimistic conclusion may not be valid.3. While the evidence on poverty has been muddied by changes in the procedure of data

collection, which have made the recent survey data non-comparable with earlier estimates,

overall indicators suggest that while the incidence of head-count poverty had been

declining from the mid 1970s to 1990, subsequently that decline has been slowed or halted.

46


of the majority of its citizens. Such a change in the nature of the state may therefore

be a fallout of the substantially increased income inequalities associated with

liberalisation and the social and political processes that they unleash. These

inequalities have accentuated certain longer-term structural features of South Asian

societies, whereby more privileged groups have sought to perpetuate and increase

their control over limited resources and channels of income generation in the

economy. This, in turn, has involved the effective economic disenfranchisement of

large numbers of people, including those who occupied particular physical spaces in

rural areas, or were urban slum dwellers who constituted both the reserve army of

labour for industrialisation and the most fertile source of labour supply for extra-legal

activities. The basic disregard for 'rule of law' which has characterised economic

functioning in most parts of South Asia over several decades, became even more

pronounced in this period, with both economic and other lawlessness becoming

accepted features pervading all aspect of civil society, and allowed everything even

the rights of citizens to become marketable and negotiable. Meanwhile, ordinary

citizens tended to experience reduced civil liberties and security along with worsening

socio-economic rights, which may even have been necessary to allow the more

centralised state to direct particular forms of lawlessness to the benefit of powerful

agents and groups

These concomitant trends of greater economic and financial centralisation and

increased income inequality in turn operated to aggravate the various regional,

fissiparous and community-based tensions that have become such a defining feature

of South Asian societies and polities. One of the features of the region as a whole has

been an increase in the degree of instability and the growing absence of security. It

has been reflected not only in greater cross-border tension, as between India and

Pakistan, but also in civil and communally inspired clashes within national

boundaries. These conflicts both emerge from the prevailing material contradictions

and contribute to them. They also serve the very important political economy use (for

the states concerned) of distracting people from the real and pressing issues resulting

from the governments' denial of basic economic responsibility, and serve to direct

anger in other less potentially threatening directions.

bviously, not all such tension has had a direct and monocausal material Ounderpinning. Nevertheless, it is true that the combination of greater material

insecurity in terms of both lower real incomes and more precarious employment

opportunities for a very large section of the population, with the explosion of

conspicuous consumption on the part of a relatively small but highly visible minority,

can have very adverse social and political consequences. The frustration that may

arise because of the gap between aspiration and reality for growing numbers of people

in the system can be only too easily directed towards any apparent or potential

competitor in such a system, or even to those who are not in competition but simply

represent a group that can be attacked with relative ease. The streak of venom that has

been periodically directed towards various minority groups across the region can be

seen as one expression of this trend. The inability to confront those who are

responsible for the system, or actually benefiting from it, or even the lack of desire to

45


BibliographylC. P. Chandrasekhar and Jayati Ghosh, The market that failed: A decade of neoliberal

economic reforms in India, (New Delhi: Leftword Books, 2002).lV. K. Ramachandran and Madhura Swaminathan (eds.), Agrarian Studies, (New Delhi:

Tulika Books, 2002).lPrabhat Patnaik, Whatever happened to imperialism?, (New Delhi: Tulika Books, 1995).lPrabhat Patnaik, The retreat to unfreedom: Reflections on the current world order, (New

Delhi: Tulika Books, 2002).lDelhi Science Forum, Alternate Economic Survey 2001-02.lMahbub-ul-Haq Development Centre, South Asia Human Development Report 2002 and

2003, Lahore, Pakistan.lJayati Ghosh, Women in India: A status report, 2003, available at www.macroscan.orglWilliam Easterly, The political economy of growth without development: A case study of

Pakistan, (Washington, D.C.: The World Bank, 2001).lM. Muqtada, 'Promotion of employment and decent work in Bangladesh: Macroeconomic

and labour policy considerations', (Geneva: ILO, 2002).

Informal and Free Trade ArrangementsNisha Taneja

he importance of studying informal trade in South Asia can be best understood if

it is placed in the context of formal trade. The South Asian countries have made Tseveral attempts at enhancing trade in the region. As early as 1985, the South Asian

countries of Bhutan, Bangladesh, India, Maldives, Sri Lanka, Pakistan and Nepal

formed the South Asian Association for Regional Co-operation (SAARC). In 1991, a

South Asian Preferential Trading Arrangement (SAPTA) amongst the SAARC member

countries was set up with the ultimate goal of achieving a South Asian Free Trade

Area (SAFTA). The signing of the SAFTA at the 12th SAARC Summit held in

Islamabad is now a reality. In addition, there have been several bilateral free trade

agreements within the region. India has free trade agreements with Bhutan and Nepal

and has recently signed one with Sri Lanka. Similarly, Free Trade Arrangements are

being negotiated between Pakistan and Sri Lanka and between Bangladesh and

Pakistan. Despite such efforts by the South Asian countries, trade within the countries

continues to be abysmally low. Clearly there would be other mechanisms that would

inject vitality into trade flows in the region. One way would be to focus on the large

and vibrant informal trade in the region. It is in this context that the present focus is

on informal trade flows in the South Asian region. Available evidence suggests that

informal trade is rampant and if such trade is brought within the ambit of official

trade, a significant increase could be witnessed. However, this will largely depend on

the nature of informal trade, which is discussed later.

here are two key issues that are at the forefront of studying informal trade in the

South Asian region- the magnitude of such trade and the factors underlying such Ttrade flows. Quantitative estimates are important since they would reflect the extent

of potential trade that exists in the region. If recorded trade statistics give a

misleading picture of the actual amount of trade taking place, poor regional trade

policies may be formulated. In the latter issue it is important to understand the

institutional mechanism that drives informal trade, how it differs from formal trade

and why such trade takes place. To the extent that high tariffs and non-tariff barriers

in the South Asian region encourage the use of informal channels, bilateral/regional

Free Trade Arrangements would induce a shift of informal trade flows to formal trade

channel. However, if there are factors other than trade policy distortions that

determine informal trade, then a deeper understanding is needed. Thus, as long as the

transacting environment for informal trading is more efficient than that of formal

trading, informal trade may continue to co-exist with formal trade. It is useful to

47 48


products.

ndia's official exports to Pakistan consist largely of food items- the main item being Ianimal feed stuff; primary products mainly iron ore and crude vegetable materials,

and manufactured goods- the chief item being building material. Official imports

comprise of food items, mainly sugar and dry fruits.

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al. (2002) for Sri Lanka and Nepal; Economist

(1996) for Pakistan; Rao et. al. (1997) for Bhutan. Notes : X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1996), 4. (2000-01), 5. (1993-94)

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al.(2002) for Sri Lanka and Nepal;

Commodity Trade Statistics for Pakistan, Nepal and Bhutan.Notes: X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1994), 4. (2000-01), 5. (1994).

s Bangladesh is sandwiched between the north-eastern region of India and the AWest Bengal borders of India, informal trade between India and Bangladesh

takes place both along the borders between West Bengal and Bangladesh and between

the north-eastern regions and Bangladesh. Commodities exported informally from

India to Bangladesh through West Bengal comprise of cattle, sugar, kerosene oil,

sarees, bicycles, automobile components and parts and other consumer goods like

plastic items, razor blades, medicines etc. Items imported from Bangladesh into India

through West Bengal comprise of synthetic fabrics, spices and Hilsa fish. Informal

exports from the North East Region to Bangladesh comprise fruits, fish, sugar, cattle,

raw cotton, spices, medicines, sarees and coal. Imports on the other hand consist of

polythene, palm oil, plastic shoes and a range of miscellaneous consumer items. The

formal exports are dominated by industrial manufactures among which textile

products is the largest item. India's formal imports from Bangladesh comprise largely

of crude raw materials- chiefly jute, and Chemical related products- mainly fertilisers.

50

Table 1 India's Informal Trade with South Asia

Exports (X)

Imports (M)

Trade Balance (X-M)

Total Trade (X+M)

Bangladesh1 299.0 14.0 285.0 313.0 Sri Lanka 2 185.5 21.8 163.7 207.3 Pakistan3 n.a. n.a. Positive 2000 Nepal4 180.0 228.0 -48.0 408.0 Bhutan5 31.3 1.2 30.1 32.6 Total South Asia - - - 2960.9

Table 2 India's Formal Trade with South Asia

Exports (X)

Imports (M)

Trade Balance (X-M)

Total Trade (X+M)

Bangladesh1 349.1 7.8 341.2 356.9 Sri Lanka2 640.2 45.0 595.2 685.2 Pakistan3 157.2 36.1 121.1 193.3 Nepal4 141.0 255.0 -114.0 396.0 Bhutan5 7.0 3.0 4.0 10.0 Total South Asia - - - 1641.4


classify factors determining informal trade flows into two broad categories: (i) those

that are related to trade policy barriers and (ii) institutional and other factors. ince India is the only country which shares its borders with almost all the South SAsian countries and at the same time no country shares its border with countries

other than India within South Asia, the central actor in informal trade has been India.

India shares a long and porous border with Bangladesh, Nepal and Pakistan. Informal

trade with these countries largely takes place across the land borders. Informal trade

with Sri Lanka takes place largely through air passengers, with a small proportion

being carried out by sea through country boats. A crucial aspect to be kept in mind

while analysing issues related to informal trade is the definition of such trade flows.

Informal or unrecorded trade is broadly defined to include all trading activities

between any two countries which should be included in the national income according

to national income conventions but are presently not captured by official national

income statistics.

I. Magnitude of Informal TradeThe only method to estimate informal trade flows is through primary surveys. The

Delphi technique is the most robust methodology used so far. It is essentially used for

gathering and processing the opinions of informed individuals. The iterations are

repeated till broadly converging responses are received. Reasonably good estimates

are available for Bangladesh, Nepal and Sri Lanka that are based on the Delphi

technique. Estimates for Bhutan are based on primary surveys, but the methodology

is not clear. Information on estimates for Pakistan is quite scanty, though its informal

trade is believed to be the largest in the South Asian region.

It is worth noting some interesting features. Total informal trade in the South Asian

region exceeds US$ 3 billion which is almost double the formal trade in the region for

corresponding years for which informal trade estimates are available. India's informal

trade with Pakistan is almost ten times that of formal trade in the region, that with

Nepal and Bangladesh is almost as large as formal trade, with Sri Lanka it is almost

one-third of formal trade and that with Bhutan is three times as much as formal trade.

(see Table1 and Table 2)

Another noticeable feature is the fact that India has a trade surplus with Bangladesh,

Pakistan, Sri Lanka and Bhutan on the unofficial trade account, while with Nepal it

has a trade deficit. Interestingly, a similar pattern can be observed on the official trade

account. (See Table 1 and Table 2)

ne also needs to examine the extent to which the composition of formal and Oinformal trade differs. Of the US$ 2 billion informal trade with Pakistan, almost

half is traded through third countries (technically official trade) such as Dubai, CIS

countries and Afghanistan, while the remainder is cross-border informal trade.

Unofficial exports through both routes comprise machinery, cement, tyres, tea,

medicines, videotapes, alcoholic beverages, chemical products, steel utensils etc.- the

range covering low cost mass scale produced goods to Indian branded items such as

Tata's Tetley tea and products made by Dabur and Pioma Industries. Informal

imports from Pakistan consist of food items, synthetic fibers and some chemical

49


ndia exports informally sarees, electrical and mechanical items, textiles and

utensils to Sri Lanka while informal imports consist of spices, electronic items, I in informal trade cannot resort to the law for violation of terms of contract.

Consequently, it is reasonable to assume that individuals trading through the informal

channel have developed parallel institutional mechanisms for contract enforcement

and dispute settlement. Also, the smooth functioning of such markets shows that

traders have developed efficient mechanisms for obtaining information on quantities

and commodities to be traded and for mitigating risk that arise from the transacting

environment. On the other hand, it is important to understand the institutional

structure that supports formal trade where exchange is affected by factors which are

not related to the physical process of production, such as administrative processes,

government rules and regulations, infrastructure bottlenecks, etc. Thus, if the

institutional arrangement under informal trading is more efficient than that

supporting formal trade, traders may prefer to trade informally.

he inadequate transport and transit systems that have been in existence between TIndia and her neighbouring countries have led to high transportation costs in the

region. One major hurdle in road transport between India and Bhutan is the

temporary blockages due to landslides. In the case of trade between India and Nepal,

the terrain in Nepal makes building and maintaining roads not only difficult but

expensive as well. Even with respect to transit modalities several bottlenecks have 3been identified: port congestion, excessive documentation, delays , slow movement of

goods, non availability of equipment and railway wagons, transhipment and other

indirect costs. A large part of trade therefore takes place informally. Thus traders use

the informal channel in order to save on transportation costs. Particularly in the case

of perishable commodities it is more cost effective to trade informally. Thus, as long

as transport costs are higher in the formal channel than in the informal channel,

informal trade will continue to take place.

There are other transaction costs that emanate from the transacting environment of

formal and informal trading. While informal trading markets function smoothly, there

are costs that have to be incurred to mitigate the risk associated with such

transactions. Risk in such trading has been found to be extremely low. For instance in

Indo-Bangladesh informal trading, the probability of goods being seized was less than

0.1 while that in Indo-Nepal and Indo-Sri Lanka informal trading was still lower at 40.03 . In fact, studies have shown that even when goods are seized, they can be

5released on nominal payments . On the other hand, formal trading procedures are

extremely complex in the South Asian region. For instance the number of documents 6that need to be filled up for trading is 29 for India, 83 for Nepal and 15 for Pakistan .

Also clearances have to be obtained from multiple agencies at various stages of

trading that include obtaining licences and getting clearances from banks. Such

procedures not only involve incurring costs in terms of time taken but also lead to rent

seeking activities. Traders are known to pay hefty bribes at various stages of trading

before their goods can finally reach their destination.

ntrinsic to the activity of trading is the issue of payments. Formal banking facilities Iare not only inadequate in the region but also very time consuming. Traders have

to wait for several days before their payments can be realised. The informal banking

51 52


third country goods, with clear reference to flow of goods informally from Nepal to

India. It is not widely known that informal trade from India to Nepal in locally

produced goods is of equal magnitude and cannot be ignored in bilateral talks. The

bilateral Free Trade Agreement between India and Nepal was renewed in 2002 but

did not recognise the importance of the two-way informal trade flow.

There is no doubt that the implementation of SAFTA and other bilateral trading

arrangements would lead to a reduction in informal trade flows. It may be stated here

that the incidence of informal trade, particularly in goods from third countries into

India has come down with lowering of tariffs in the region. For instance, in 1991,

informal trade in third country goods from Sri Lanka to India was almost as large as

informal trade from India to Sri Lanka. Further, in 1990, informal trade in third 10country goods from Nepal to India was almost 10 times of formal trade . Recent

estimates of informal trade in third country goods show that such trade has come

down considerably and further reduction and harmonisation of tariffs would reduce

the incidence of informal trade.

t is evident that the institutional mechanism in the informal trading market Ifacilitates informal trade. The channels through which informal trade takes place

are rooted in the strong ethnic ties among the traders and in the historical linkages in

these societies. Ethnic trading networks that operate on trust and honesty mitigate

risks associated with such trading. The involvement of law enforcement agencies to

collect rents (thereby mitigating informal trading risks) makes the transacting and

transporting processes smooth and acts as an added incentive to carry on informal

trade. It is easily perceived that informal trade under these circumstances would be

difficult to eliminate. While it can well be argued that if the transacting environment

for informal trading is more efficient than for formal trading, why not let it continue-

the danger is that the associated money laundering to finance such trade deals might

prove to be a threat to the smooth functioning of formal capital markets. A focus on

law enforcement agencies to detect and obstruct informal transit of goods across

borders is not a viable solution as increase in enforcement mechanisms could only

lead to increase in rent collections. What would be more effective would be to reduce

the impediments to trade in the formal channels. Time delays due to unnecessarily

long and complicated procedures need to be reduced by simplifying procedures.

Clearly, the reform process in the South Asian countries should undertake

institutional reforms so that transaction costs can be lowered. This would also have a

much larger impact in the form of trade expansion from and within the South Asian

region. Information is another important aspect, which has to be looked into. It is true

that a major proportion of informal traders are locals who do not have high levels of

education or are only conversant with local languages. Such gaps have to be filled by

suitable dissemination of information and creation of awareness among traders of the

various norms.

n sum, while informal trade is unlikely to be totally eliminated because ethnic Itrading networks between trading partners would continue to facilitate informal

trade by reducing transaction costs through minimisation of risk costs, market

54


system, on the other hand, is very organised and payments are not only ensured but

are also very quick. The uniqueness of the informal banking system is that there is no

physical transfer of currency. This mechanism, referred to as Hawala in India, Hundi

in Bangladesh and Undiyal in Sri Lanka, operates on the same principles. Partner

country currencies are easily convertible in the informal money market making it

possible for traders to trade in different currencies. In fact, the informal banking is so

efficient that payments can be received within a day. Traders may therefore prefer to

use the informal channel as it has a better payments mechanism than the formal

channel.

erhaps what lies at the core of informal trading markets is the close ethnic ties Pbetween trading markets. A common language, religion, culture etc., play a

crucial role in facilitating trading across the border. This is particularly so where the

same ethnic community is divided into two national boundaries; for example in the

case of India, Bangladesh, Pakistan and Nepal. There are strong ethnic links between

the Tamils in South India and those in Sri Lanka. Ethnic ties amongst trading partner

countries in the informal channel not only ensure that payments are made but also go

towards reducing risk and other transaction costs in carrying trade across borders. It

has been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka informal 7trading ethnic ties are stronger in the informal channel than in the formal channel .

In some cases, traders trade informally not because they are unwilling to abide by

laws and regulations but rather because they lack the necessary resources to do so. A

large number of informal traders have low levels of education. The lack of education

deters traders from using the formal channel. Also, lack of education would preclude

traders from having information on trade policy. Most informal traders are not aware

of the details of different trading arrangements. In fact informal traders in Sri Lanka

have pointed out that the terms and conditions of trade agreements are available only 8in English and not in any local language spoken in the two countries . Under such

conditions, traders would prefer to use the informal channel. It has been found in

various studies that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka trading,

levels of education for formal traders are significantly higher than those of informal 9traders .

III. Concluding RemarksIt is evident that informal trade in the region is quite large and cannot be ignored in

any policy dialogue. The Framework Agreement for SAFTA signed at the 12th SAARC

Summit does not address this issue. Informal trade between India and Pakistan,

believed to be the largest is a subject area where not much information exists. As the

two countries move closer to improved trade relations, it is important to understand

the functioning of such markets and the inadequacies of the formal trading channel.

The Indo-Sri Lanka Comprehensive Economic Partnership Agreement Framework

signed recently includes trade services, corrects the anomalies of the currently

operational Indo-Sri Lanka Free Trade Agreement but makes no attempt to look into

the issues of informal trade. India and Nepal have a long history of bilateral FTAs

signed since 1961, but these agreements have focused only on unauthorised trade in

53


information and search costs; further reduction of tariffs, improvements in the

transacting environment of formal trade, improving awareness and education levels

55 56


promote trade for individual countries is not to worry about how their partners

reciprocate if they themselves open their borders. Borders not only in the developing

countries but all across the world are blocked with all manner of barriers. They cover

the entire gamut of restrictions governments place in the free flow of goods across

their frontiers. These restrictions include tariffs, quantitative restrictions, and a vast

variety of non-tariff barriers. The last category encompasses practices such as health,

labour and environmental standards importers impose on the exporters. Sometimes

importers also include the requirement that the products imported by them contain a

certain amount of raw material that originates with them. How to dismantle these

barriers? According to pure economic theory, unilateralism is the only way to

proceed since the advantages of free trade are far greater than the damages they may

cause.

owever, since that is not the way the world functions, purists are prepared to Hmake room for global trading arrangements such as the one that led to the

creation of the World Trade Organisation. The WTO is the second best route towards

free trade. This is about as far as pure theory is prepared to go in terms of promoting

global trade. It has no patience with regional trading arrangements (RTAs).

But there are pragmatists who argue that in an imperfect world, regional trading

arrangements (RTAs) play an important and productive role. But, argue the

proponents, such arrangements must be open, they must not discriminate too much

against those who are not included within their purview. Open regionalism of this

type is useful for a number of reasons. To begin with, it locks in a government's

commitment to lower tariffs and to the removal of other constraints against a

relatively free movement of goods. Countries operating on their own can- and often

do- change trade regulations in response to pressures by vested interests or to meet

resource shortfalls. This has been sdone very frequently in Pakistan by a device called

the SRO, issued from time to time by the Central Board of Revenue, usually in

response to pressure from vested interests. Such unilateral actions are difficult to

take when countries surrender some of their rights and a bit of their sovereignty to

regional trading arrangements.

TAs also lead to greater foreign direct investment. Foreign investors operating Rwithin RTAs have the comfort that government policies will not change

suddenly. They can also access much larger markets. They can locate their

investments in one place and expect to sell their goods in a wider market. Some RTAs

also tie their member countries to follow certain rules in the areas of politics, human

rights, governance and the like. Mercosur- an arrangement between Argentina,

Brazil, Paraguay and Uruguay- makes it incumbent upon the member countries to

design their political systems in line with the basic principles of liberal, representative

democracies. Any sharp deviation from this type of governance can lead to expulsion

from the arrangement. It was this requirement in the treaty that originally set up

Mercosur that prevented a military take-over in the perpetually troubled Paraguay in

the late 1990s.

When we talk about regional cooperation from Pakistan's perspective, should we talk

58


Pakistan, India and Regional CooperationShahid Javed Burki

IntroductionThe main conclusion reached in this essay is that the full and unconstrained

resumption of trade on the basis of MFN (most favoured nation) status granted by

India and Pakistan to each other, as required by the World Trade Organisation, holds

great promise. It has been seen in many parts of the globe that deep animosities

among nations can be overcome by trade which produces a dynamic of

interdependence between people and the owners of production systems. It has often

been claimed that democracies don't go to war with one another. That may be true to

some extent. It can also be maintained that countries that have tied their economic

systems with bilateral and regional trade agreements find it difficult to use military

force to settle differences. The main line of thought to be advanced in this article is

that the peace process between India and Pakistan would succeed if it is supported

vigorously by trade. However, to make sure that the two countries don't use 'trade

wars' as they did in the 1940s and 1950s to make political points against one another,

it would be a good strategic move to fix Pakistan and India into a regional trading

arrangement.

his thesis is developed in four sections in addition to the introduction and Tconclusion.

?Section one looks at regionalism in trade and how the lessons learnt from the

experience of other regions in the world could be applied to South Asia.

?The second section examines Pakistan's recent economic situation and explains

why a leap frog strategy of growth, adopted within the context of a South Asian regional trading arrangement could help the country improve on its recent growth performance.

?The third section analyses the Indian situation and focuses on how trade in

'knowledge-intensive' goods and services is helping India turn its population into an economic asset.

?The fourth section provides in rough form the contour of the regional trading

arrangement that could emerge in the region for the next one decade, say by the year 2015.

I. Why Regional Trade?Economic theory is ambivalent about regionalism- an arrangement that provides the

members of a regional association preferential access to each others' markets. The 1purists have no time for such an approach . They maintain that the only way to

57

59 60


only about South Asia or should we also look at other possibilities including regional

alliances with the non-Arab countries of the Middle East, the Muslim countries of

Central Asia, even bilateral trading and economic arrangements with China, Asia's

largest and most dynamic economy? We should certainly look at all these

possibilities. We will for the moment concentrate on the subject of regional

cooperation in South Asia.

hree of South Asia's largest economies, Bangladesh, India and Pakistan, were Tonce part of a single political entity- British India. It was, therefore, inevitable

that even after partition, there would be considerable inter-country flow of goods and

commodities. This happened, but only for a while. In 1948-49, the first full year after

partition, 32 per cent of Pakistani imports came from India while India bought 56 per

cent of Pakistan's exports. Fifty two years later, the situation was dramatically

different. In 2000-01, India imported only 0.42 per cent of Pakistan's exports and

provided only 0.13 per cent of the latter country's imports.

In absolute terms, Indian exports to Pakistan in 2000-01 were valued at only US$ 186

million out of a total of US$ 44 billion. In the same year India imported only US$ 65

million worth of goods and commodities from its northern neighbour while its total

imports were US$ 50 billion. While politics have obviously interfered in the conduct

of trade between India and Pakistan, other countries have not done well either. South

Asian intra-regional trade declined from 19 per cent in 1948-49 to 12 per cent in the

early 1950s to only 2-5 per cent in recent years.

These official numbers, however, underestimate the real volume of trade between the

countries in the region, particularly between India and Pakistan. Estimates of illegal

trade between these two countries through smuggling or through third countries (for

example Singapore and Dubai) put its value at one billion dollars a year. From being

major trading partners at the time of their birth, India and Pakistan now exchange

very little of the goods, commodities and services they produce.

hile political quarrels between India and Pakistan have caused many Wproblems, they are not the only reason why intra-regional trade did so poorly

in South Asia. There were several other causes as well, among them the autarkic

economic policies followed by all countries in the region, poor communication links

among the countries and lack of complementarity in the products produced by the

regional economies. Let me deal with each of these three factors.

The South Asians, under the influence of Fabian socialism bought to the region by

Jawaharlal Nehru, India's first prime minister, and later adopted by Prime Minister

Zulfikar Ali Bhutto in Pakistan and Mujibur Rahman, Bangladesh's first president for

his country, gave a large role to the South Asian state. In turn, the governments of the

region pursued import substituting policies in both industry and agriculture, de-

emphasising export led growth that brought economic miracles to East Asia.

The South Asians, having taken the decision to delink their economies, made no effort

to improve intra-regional communications. This was an incredibly short sighted and

economically self-defeating policy to adopt. The British had left a fairly well

developed road and railways network that linked all parts of their large empire in

India. The North Western Railway linked Karachi with Delhi and the fabled Grand

Trunk Road connected Peshawar through Delhi with Calcutta. The railway and road

network that was built with the NWR and the GT Road as their backbones could have

been of considerable economic value had the two countries continued to develop

them. That, of course, did not happen.

nd in so far as the complementarities among the regional economies are Aconcerned, these were not sufficiently pronounced for several decades to warrant

the development of strong regional trading ties. It is only in recent years, with the IT

sector becoming a leading player in the Indian economy, that Bangladesh, Sri Lanka

and Pakistan can begin to take advantage of what India has already achieved.

Even if Pakistan and India have the political will to open their presently closed

borders to inter-country trade, it would be better to do it initially in the context of a

regional arrangement. Using such an arrangement will reduce the temptation for

either country to use trade as a weapon of diplomacy. The time has come to build

these relations on a more robust foundation.

II. Growth Strategy for PakistanOnce Pakistani policymakers begin to factor in international trade as an important

determinant of development, they could adopt an entirely new strategy of growth.

This strategy, as we will suggest below, would not necessarily follow those that

propelled the region of East Asia and China towards relative prosperity. It would also

not seek to build the knowledge-intensive export sector to the extent India has done.

Instead, it could follow a strategy of its own- a kind of hybrid based on the

experiences of other Asian nations.

Pakistan could follow one of the three models that have been tried successfully by

various Asian countries. The first of these is the model that produced the 'miracle

economies' of East Asia. Also called 'tigers' and 'cubs,' these economies essentially

tapped the large export markets available in the industrial world. This strategy

essentially duplicated what Japan had done in the 1950s and 1960s. In following

export led strategies, the industrial sectors in the miracle countries were guided by

the state which identified areas for them to expand into. The industries that were

being helped were almost always privately owned.

onetheless, the state not only helped industries identify markets abroad, it also Ngot the financial sector to lend large amounts of money to the chosen industries

at below market rates. In the parlance of economics this was called 'directed credit'-

credit provided by banks to industries at the direction of the state. This connection

between industry and finance proved remarkably successful but it also led to the

financial crisis of 1997-98. What came to be called 'crony capitalism'- that is how

directed credit evolved- worked for a while but had to be adjusted once the financial

crisis exposed its weaknesses. This has been done successfully and the East Asians

are back on the high growth trajectory- something few analysts expected at the peak


Asian countries, what strategy should Pakistan follow? Islamabad has a menu of

options available. It could use private industry to aggressively enter the export sector,

exploiting the abundant financial resources now available within the reformed

financial sector. This would mean following the track previously travelled by the

miracle economies of East Asia. But, unfortunately for Pakistan, there is not much

synergy between the structure of Pakistan's industrial sector and the nature of

demand in the world's large markets. Pakistan will not be able to duplicate the

experience of East Asia.

r, alternatively, Pakistan could invest massively in developing its large human Oresource by providing it with education, health and opportunities for skill

development and knowledge accumulation. Such a strategy could work if Pakistan

had the resources but more importantly the political will. When China went on that

track it saved about 42 per cent of its gross national income, a proportion more than

three times Pakistan's abysmally low saving rate of today. China's human resource

oriented strategy produced results after two generations, or at least a generation and

a half, had been sacrificed for the sake of the future. Pakistan neither has the luxury

of time nor the political will on the part of its leaders to take the country through such

a grind.

Finally, Pakistan could follow the Indian approach of concentrating on the

accumulation of skills and knowledge by one segment of the population. A small

(small relatively to the size of the population but still numbering in the millions)

highly skilled workforce could enter the growth niches available in the global markets.

This is the strategy adopted by the first administration of President Pervez Musharraf.

It was championed with great energy by the then Minister of Science and Technology,

Dr. Atta-ur-Rahman. Unfortunately, it did not produce the promised results.

I would advocate, instead, an approach that draws a bit on the Indian experience but

then moves on an altogether different track. This two pronged approach would still

emphasise knowledge and skill development as India has done so successfully. Based

on a well equipped workforce, Pakistan could either export its abundant workforce or

take part in the rapidly evolving 'outsourcing' opportunities that are changing the

global production system. On the other track, Pakistan could become the hub of

north-south and east-west commerce. The north-south track could link Central Asia,

including Afghanistan, with India and points beyond. The east-west track could

connect the western parts of China with the Arabian Sea through the ports of Karachi

and Gwadar. These two tracks will cross in Pakistan and bring enormous benefits to

the country.

or Pakistan to follow such a strategy, it will have to undertake large investments Fin improving the physical infrastructure- roads, railways, ports and airports. It

will also need to develop its economy to supply this transit trade with the services it

needs including insurance, finance, warehousing, processing, transhipment, etc.

Modernisation of the service sector to facilitate such a strategy would mean focusing

on creating appropriate levels of skills within the country in a number of diverse

62


of the crisis.

The other model that Pakistan could adopt was pursued by China. It focused on

developing the human resource by providing all people- boys and girls, men and

women, and residents in all parts of the country- with free education and health.

China's human resource development occurred in an environment of authoritarian

management of the economy and of the political system. Either by design or purely

because of pragmatism, the Chinese, starting in the 1970s, released the enormous

energies of this well educated and healthy labour by gradually loosening the political

and social controls they had placed on them. First agriculture and then small scale

and privately owned industries responded to these incentives. The rest, as they say, is

history.

hen there is the Indian model, one aspect of which we will discuss below in some Tdetail. What is today known as the 'Indian way' was not a well thought-out

strategy initially. In fact, the explicit Indian strategy for development adopted by the

country's first generation of leaders achieved a result exactly the opposite of that

intended. It constrained growth rather than accelerating it. In the period between

the mid 1950s and the mid 1980s, the Indian economy chugged along at what came to

be called the 'Hindu rate of growth' a growth rate of some 3-3.5 per cent a year. The

model being followed now is the product of a series of accidents and ad hoc decisions.

It has as its foundation Prime Minister Jawaharlal Nehru's decision taken in the

1950s to set up half a dozen institutes of technology. When these institutes began to

produce thousands of engineers and science graduates, there were very few

employment opportunities available within the state dominated, moribund, highly

inefficient and stagnant industries. A large number of graduates of the now famous

IITs had to look outside India for jobs and they found thousands of them in the

telecommunications, information and communication technology (ICT) industry in

the West. When, in the late 1990s and the era of dotcom explosion, the U.S. industry

ran into serious skill shortages, a significant part of this was met by labour imports

from India. Thus the Indian Diaspora was created which in the 1980s and 1990s not

only acquired great wealth but also considerable experience and expertise. Once the

non-resident Indian community had become viable in terms of size, wealth, income,

and expertise, it was able to help with the development of the ICT industry back in the

homeland. Consequently, India's IT sector became one of the most vibrant in the

world.

hat we see in India today is an economy that is being pushed forward by a Wgrowth rate which has relied very heavily on knowledge accumulation as an

important contributor to growth. India's policymakers are now confident that, based

on the recent transformation of the economy, they will be able to get their country to

climb on to the same growth trajectory on which China is proceeding. This, in sum, is

the much applauded Indian model of economic success.

Looking at the future, but also looking back at the experience of the various successful

61


areas.hat I have spelt out above is a strategy for sustained growth and development Wsuitable for a country in Pakistan's situation. Pakistan could successfully

exploit its young people to work for the skill-short sectors in the western economies.

It could, at the same time, use its geography as a point of transit for two routes- new

versions of the old Silk Route- that would allow commerce to flow from different parts

of the world. Following this two-pronged approach, Pakistan could leap frog into the

future without going through the paces of development followed by other Asian

countries. But a great deal of thought and planning will need to be done to develop

and implement this novel strategy. And, most important of all, for this strategy to

succeed Pakistan will need to draw strength from its neighbours, particularly India,

and work within the frameworks of regional trading arrangements. In the section

that follows, I will examine how India has fared in the last few years after analysing

how Pakistan could benefit from its neighbour's experience.

III. A Resurgent IndiaPakistan's rapidly improving relations with India should produce economic

opportunities that could be successfully employed. One of them is in the sector of

information and communications technology, or ICT, where India has begun to

experience shortages of skilled workers. There are reports of reverse migrations of

Indians from the United States back to their homeland. There are also reports of

Indian companies entering into strategic alliances with firms in Asia in order to enter

the rapidly expanding markets of the region. Could Pakistan take advantage of these

developments? To answer this question, let us first look at the IT sector.

The global economy, in spite of some recent hiccups, has begun to respond to some

extraordinary developments in information and communication technologies. Rapid

progress in electronics, telecommunications, and satellite technologies over the last

two decades permit high-capacity data transmissions at a very low cost. This has

brought about a quasi-neutralisation of physical distance as a barrier to

communication and as a factor in economic competitiveness. As Andrew S. Grove,

founder and CEO of Intel Corporation, said at a software conference in October 2003,

'from a technical and productivity standpoint, the engineer sitting 6,000 miles away

might as well be in the next cubicle and on the local area network.'

t is the enormous reduction in the cost of communicating with distant places and Ithe ease with which enormous amount of data and information can flow

instantaneously that has brought about the shrinking of physical space. For instance,

in 1985 the cost of sending 45 million bits of information per second over one

kilometre of optical fibre was close to one hundred dollars; in 1997 it was possible to

send 45,000 million bits per second at a cost of just 0.05 cents. This has led to the

redefinition of the work place. Even those working on a single project, such as the

architectural design of a new building, don't have to sit together or be located in

adjacent offices. They can easily communicate with one another over the internet.

All change is unsettling; rapid change such as the one brought about by the revolution

in ICT has had the same effect in many different ways. Initially the fear was that this

extraordinary development will produce an unbridgeable digital divide between the

rich and the poor across the globe as well as within countries. This fear led the UNDP

to devote the better part of its Human Development Report, published in 2001, to this

subject. The authors of the report warned that unless full cognizance was taken of the

adverse consequences of the spread of information technology, there was a real

possibility that a couple of billion of world citizens will be condemned to live for

generations within impoverished ghettos scattered all around the globe.

owever, as with most technological changes, the benefits that accrued to both Hindividuals and countries that were quick to participate in this change far

outweigh the associated costs. That notwithstanding, there is now the opposite fear,

expressed by many in the United States. This concerns the possible loss of jobs to

places such as India, a country that has shown the ability to turn their large and

young populations into economic assets rather than burdensome liabilities. There is

no doubt that under the influence of the IT revolution, the global economic system is

going through a fundamental transformation. One manifestation of this is the way

corporate America is linking itself with the high-technology sector of India. But those

who are adversely affected initially by this link see it as a 'zero-sum' development, in

which India's gain comes at the cost of America's loss. There is greater likelihood that

this will prove to be a 'plus-sum' game in which both sides, India and the United

States, will gain.

hy is India the most prominent beneficiary in the developing world of the ICT Wrevolution? This question has many answers; of which two provide a clue to

what is happening in that country. One, India's great success in the ICT sector,

particularly as an exporter, is owed in part to a decision taken half a century ago by

Jawaharlal Nehru, the country's first prime minister. When Washington decided that

the imperatives of the cold war required it to provide large amounts of economic and

technical assistance to South Asia, Nehru asked for the establishment of institutions

patterned after the MIT. This initiative led to the founding of the Indian Institutes of

Technology at six different locations. The IITs now have the well-earned reputation

of producing world class engineers and scientists. However, these institutions served

only a small segment of the country's vast population. Last year, for instance, they

accepted only 3,500 of 178,000 persons who applied for admission. Very wisely, the

Indian government, drawing a lesson from the success of the IITs, replicated them

within the large public sector.

While the IITs became institutions of excellence, the entire public sector geared itself

to train tens of thousands of scientists and engineers. Consequently, India now

produces 3.1 million college graduates a year, a number that is expected to double by

2010. The number of engineering colleges is expected to grow 50 per cent, to nearly

1,600 in four years. Not all the graduates are qualified to do world class work which

is the reason why there is a movement to improve the quality of teaching by offering

much higher salaries. Indians living abroad are also helping. The non-resident

Indians (NRIs) in the United States have teamed with Wharton School and

63 64


IV. A South Asian Regional ArrangementOne way of promoting trade relations with India is to do it within the context of a

regional arrangement. That could be one way of overcoming the enormous suspicion

that exists on both sides of the border. This suspicion cannot be suddenly willed away

in a season. Working with India within the regional context may be a good way to

start.

outh Asia has already paid a heavy price for not taking the regional route. In the Slate 1950s, when economic development was adopted as a major goal by all

developing countries, South Asia and East Asia were at about the same stage of

development. In the early years of the 21st century, the latter region has left the

former behind by a very wide margin. In terms of average incomes of the citizens of

the two regions, East Asia is about ten times richer than South Asia. Even if we

assume that better regional cooperation would have added, on average, one

percentage point of growth to the South Asian regional output, the combined GDP of

South Asia today would be at least 70 per cent higher. This would have translated

into an equivalent increase in per capita income and a considerable decline in the

number of people living in poverty. It would not be an exaggeration to say that a

significant part of the persistence of poverty in South Asia can be attributed to the

lack of economic cooperation among the countries of the region.

Another way of assessing the benefits of closer economic cooperation among the

countries in the area is to look at the impact of open trade between India and

Pakistan, the region's two largest economies. A study prepared for the World Bank in

1993 estimated that free exchange of goods and commodities between India and

Pakistan would have resulted in a nine-fold increase in the flow of trade between

them over a period of five to ten years. Simply removing the import bans the two

countries have placed on their exports to one another could bring enormous gain to

both sides. For instance, granting each other the 'most favoured nation' status but

still maintaining a 50 per cent tariff would increase the volume of trade between the

two countries by a factor of three.

As a member of the World Trade Organisation, Pakistan is supposed to grant the

'most favoured nation' treatment to India. This has not been done while India has

extended this benefit to Pakistan. An MFN status would help to remove some of the

distortions that exist in the flow of trade between the two countries. But such a move

would still be within the context of bilateral relations. To go beyond that and cast

relations within a regional context, policymakers in Islamabad may begin to focus

their attention on the areas in which such an arrangement could work.

here are four areas in particular in which regional economic cooperation holds Tconsiderable promise. They are information technology, energy, water, and

research and development. Let us look at each of these in turn.

India, along with Israel and Ireland- the three 'Is'- are now major players in the global

IT sector. As discussed in a previous section, India has already carved out a

66


Northwestern University's Kellog Graduate School to found a new Indian School of

Business at Hyderabad.

he second reason for India's attraction as a destination for corporate back-office Twork is the play on what economists call 'wage-arbitrage.' This is the difference

in the cost of labor in the developed and developing countries for doing the same kind

of work. To take one example: it is estimated that this year the tax returns of some

20,000 were prepared in India, a number set to increase tenfold, to 200,000 next

year. An Indian accountant charges US$ 500 a month for this work which is equal to

the amount paid for a single day by an American preparing the same tax return.

The Indians have been able to forge alliances with corporate America that have

brought enough employment opportunities to the country to accommodate a

significant number of graduates from technology institutions. By some estimates, at

least one-third of new IT development work for big U.S. companies is done overseas,

with India the biggest site. By 2008, forecasts McKinsey, the consulting firm, IT

services and back-office work in India will increase five-fold, to a US$ 57 billion

annual export industry employing four million people and accounting for 7 per cent

of the country's gross domestic product.

While India has succeeded, is there place for other countries with young populations

for obtaining similar benefits from the rapidly changing structure of the global

economy? A large part of the increment to global output will be in the knowledge-

intensive service sector. Manufacturing in developed countries accounts for just 14

per cent of output and 11 per cent of jobs. It is in this part of the economy that initial

outsourcing occurred and East Asia and China were the main beneficiaries of that

development. The service sector accounts for 60 per cent of the output of developed

economies and more than two-thirds of employment. It is in this part of the economy

that the Indians have taken a share. But the sector is large and there is space for

other developing countries. Consider one developed country and one part of the

knowledge-intensive service sector. The output of America's IT sector is estimated at

US$ 240 billion. It is growing at a rate of more than 8 per cent a year. Indians, with

exports to the U.S. of about US$ 7 billion, still have less than three per cent share in

the market.

hat are the lessons available to other developing countries from the Indian Wexperience? There are at least four and the most important of these is to

rapidly develop tertiary education. Second, to boost government spending on

research and development, which is quite properly the province of government.

Third, provide public funding for graduate science and engineering students. Fourth,

develop financial markets so that new technology can be financed by institutions such

as Venture Capital Firms or through instruments such as high-yield bonds and initial

public offerings. These lessons would be transmitted more readily within the context

of a regional trading arrangement in which the Indian IT sector becomes a major

player.

65


significant place for itself in the world in this sector. There are many ways smaller

countries of South Asia could benefit from the enormous advances India has made.

Institutions providing training in IT could get affiliated with the well-known and

highly developed science and technology centre in India. Fledging IT companies in

Bangladesh, Pakistan and Sri Lanka could form strategic alliances with the larger

companies in India. Even though India has a very large population and thousands of

IT graduates are produced by the training centres in the country, there are some

labour shortages that could be met by the skilled workforces from other countries.

There are many other opportunities in the IT sector that could be exploited.

There are even more opportunities available in the sector of energy. Of all the major

economies on the mainland of South Asia, India is the most deficient in energy and

the existing gap between demand and supply will expand as the economy continues to

grow. What are the options available to India for closing the gap? Currently, oil and

gas constitute 63 per cent of India's primary energy consumption. According to one

estimate, oil demand will increase from 1.9 million barrels per day to 4.9 million by

2020, an annual rate of growth of 4.6 per cent a year, slightly less than the expected

rate of increase in GDP. Two thirds of oil and consumption is now met from imports.

This places a very heavy burden on the Indian economy which could be lessened

somewhat by importing cheaper electric power and natural gas from a number of

countries in the neighbourhood that have deliverable surpluses.

akistan is one source of energy India could tap. Both the structure of supply and Pdemand for energy are very different in Pakistan compared to that in India. Gas

is by far the most important source of energy supply in the country; 32 per cent of

electricity is generated by this fuel. An additional 25 per cent of electricity comes

from hydel power.

Pakistan has the potential to increase both the supply of gas and hydel power well

beyond even the more optimistic projections of increase in domestic demand. Some

100 undeveloped dam sites have been identified by various groups of experts which

could generate an additional 35,000 MW of electricity. The country also has coal

reserves of 185 billion tons, the second largest deposit in South Asia. China, which

produces a significant amount of electricity from coal and where coal still accounts for

80 per cent of electric power generation, is helping Pakistan to develop coal-powered

electric generation. Once developed, this would add to the surplus of power Pakistan

will have available for sale.

Pakistan, in other words, could become a major supplier of energy to the north-

western states of India. This won't happen unless India and Pakistan shed mutual

suspicion. This is more likely to occur in the context of formal agreements for

regional cooperation. Such an arrangement could also facilitate the supply of the

Bangladeshi natural gas to India's north eastern states and hydel power produced by

Nepal to the same parts of India.

t is as a transit country for the gas flowing either from Iran or from Turkmenistan Ito India that Pakistan could draw the most benefit from a regional arrangement in

South Asia. Take the proposed pipeline between Iran and India as an example of the

benefits that could accrue to the two countries. A study by Reliance Industries,

India's largest private sector corporation, has concluded that such a pipeline would

halve natural gas prices in India while Pakistan could collect as much as $500 million

annual fees for allowing and managing the transit of this fuel.

f the countries in the South Asian region mustered enough political will and Idispensed with some of the suspicions that have marked the relations among

them- in particular between India and Pakistan- it is not beyond the realm of

possibility to foresee the development of various kinds of energy grids in the area.

Bangladesh, India, Nepal and Pakistan in South Asia along with Afghanistan and the

Central Asian states could be connected with one another by a network of electric, gas

and oil grids that would bring enormous benefits to all of them.

Water is the third area in which regional cooperation among the countries in South

Asia would be enormously beneficial. This is particularly true for Pakistan which

receives 40 per cent of its water from outside the country, the highest figure in the

region after Bangladesh. Per capita consumption of water in Pakistan is also much

more than the regional average. This is because of the extensive use of irrigation for

agriculture- Pakistan has the world's largest contiguous irrigated area in the world.

For this reason, the country is the 14th highest consumer of water in per capita terms

in the world and the consumption is likely to increase as population continues to

grow, as cities continue to expand and the economy continues to modernise. On the

supply side there are now severe limitations on tapping domestic resources. Ground

water development is reaching its limit. Tube wells are being dug deeper and deeper,

mining the underground reservoir. If this continues for long, the impact on the

economy and the environment could be severe.

new water-sharing arrangement with India could help to alleviate some of the Aproblems since Pakistan's neighbour is also running into the same kinds of

shortages and is tempted to exploit the water available in the disputed state of

Kashmir.

It is now recognised that without technological growth, economies cannot become

efficient and worker productivity cannot increase. Without a significant increase in

productivity the incomes earned by the working poor would not grow at a rate

significantly high to pull them out of poverty. Are there opportunities available in the

various countries of South Asia that could be exploited in order to benefit the entire

regional population?

The answer is yes. India has the most developed educational and technological base

in the region which could serve other countries in the area. Its science and

technology schools have attained world status. But Pakistan also has the capacity to

develop institutions specialising in irrigation, engineering, textiles, food preparation,

and health sciences that could benefit India and other countries in the region. Models

for such cooperation already exist in other parts of the world. There are other areas in

which collaboration could occur among the South Asian countries other than the four

67 68


with India would accomplish that.ould these two motives be aligned in some way that they begin to be seen as a Cpart of a plus-sum game in which neither side loses and both sides gain? That

could happen if the building of trade between the countries- rather than solving the

Kashmir problem- is placed at the centre of the evolving détente.

(Shahid Javed Burki is currently the CEO of Emerging Markets Partnership Financial

Advisors; a Washington based consulting firm. Before joining the EMP-FA he was with

the World Bank for 25 years as Director China and Mongolia Department (1987-1994)

and Vice President Latin America and the Caribbean (1994-1999).

End Notes1. The most articulate exponent is the Indian economist Jagdish Bhagwati, who has written

extensively on the subject of regional trade and why it would hinder the development of true

multilateralism in trade. See Bhagwati, 1998.

70


we have mentioned above.V. ConclusionAt the time of the Islamabad summit, the seven SAARC nations agreed to work

towards the creation of a Free Trade Area in South Asia. They set themselves the

target of 2007 by which time the South Asian Free Trade Area, or SAFTA, will come

into force, allowing goods and commodities to move freely among the countries in the

region. This is a good move since the trade track holds the greatest promise for

bringing about peace in the South Asian subcontinent. There are plenty of examples

around the world to suggest that deep animosities among nations can be dissolved

once trade begins to move freely.

his happened, of course, in Europe which, after two catastrophic wars in the Ttwentieth century, is now a zone of peace. This also happened in the Mercosur, a

trading arrangement among the nations in the southern cone of South America. The

countries in this area had fought several wars and they continued to view one another

with deep suspicion for a very long time. The birth of Mercosur helped to change this

mind set. In fact, the warming of relations between Argentina and Brazil, the area's

two largest economies, ultimately led to both sides giving up their nuclear ambitions.

The same can be said to be true for the North American Free Trade Area that has

brought Mexico closer to the United States and is likely to stay that way in spite of the

uneven progress made by the trading arrangement during its first ten years.

In what way should SAFTA evolve? In working out a plan for its development and

evolution, how carefully should the founding countries look at the experience of other

successful regional trading arrangements? What are the lessons that could be drawn

from what has happened in other parts of the world? How much focus should be

placed on moving beyond trade to other issues that have stood in the way of regional

integration in South Asia?

istorians of deep conflicts between nations tell us that accommodation can be Hreached once the motives for doing so begin to coincide. The resolution of the

sharp animosity between Germany and France occurred when the two countries

recognised that they would gain enormously if they lifted their sights beyond narrow

national interests and started to focus, instead, on the economic future of continental

Europe. Once that happened, the rest was easy.

Unfortunately, India's and Pakistan's motives are different in seeking come kind of

accommodation. Of the many different motives that are propelling the two countries

to seek rapprochement, two are compelling. On the Indian side, the ongoing conflict

with Pakistan is a major distraction in its quest for global play. The Bharatiya Janata

Party (BJP) leaders have begun to recognise that they cannot place India on the global

map as a world player for as long as it remains entangled with Pakistan. On the other

side of the border, President Musharraf has begun to appreciate how big a menace the

rise of Islamic fundamentalism and jihadi groups has become. The two assassination

attempts on him in December 2003 seem to have convinced him to focus on

eliminating one of the reasons that provides these groups their raison d'etre. Peace

69


Women And Development In South AsiaDr Preet Rustagi

I. IntroductionWomen as a category and South Asia as a region for analysis brings up the issue of

heterogeneity vs. homogeneity (Stromquist, 1998; Agarwal, 1996; HDSA, 2000).

South Asian women and their status is being assessed in this paper to highlight the

similarities in the conditions faced by women across the region, despite the diversities

stemming from class, religion, culture and locality. This assessment is undertaken on

the basis of a select set of quantitative indicators regarding their work, survival,

health, education and political participation. The issues considered here to highlight

the gender inequalities that constrain women from their legitimate claims to

participate in and benefit from development in South Asian countries are limited by 1the availability of data , quantifiability and comparability across countries.

2outh Asia comprises seven different sovereign nations , with diverse socio-cultural Sand ethnic populations, a range of religious faiths, legal frames, economic and

political forces, all of which impact upon the lives of women in the region. Within

these diversities, the region stands together on a number of counts and the women of

South Asia too, face similar conditions on various fronts. South Asia is a highly

populated, agriculture dependent, poor income region, often identified as the most

deprived region in the world (HDSA, 1997). The region is also recognised as a

'patriarchal belt' (Caldwell, 1982), where women are subordinated to men in a kin-

ordered social structure (Mathema, 1998), have low status, little or no access to 3property and land (Bardhan, 1986) and suffer from non-recognition of their work

which is largely unpaid.

Socio-cultural practices, based on a strong patriarchal ideology prevalent in the

region, curtail women's mobility and prevent them from utilising opportunities to

enhance capabilities. Not all the spheres of gender discrimination are quantifiable, but

even within the limited arenas of labour markets, socio-cultural influences on

education, nutrition, health and political participation, women in most of the South

Asian countries face unequal treatment. Since our emphasis here is to deal with the

aspects of gender inequalities based on quantitative indicators, certain equal, if not

more critical, dimensions, such as violence against women or the influence of legal

institutions, are not dealt with.

ggregation of the situation of women in South Asia is feasible in quantitative Aterms only in certain spheres, as in the case of sex ratios, education, child

mortality, fertility rates and so on. In other dimensions such as work participation,

political participation and violence, for instance, the definitional categorisation, level

of data availability, and its periodicity, are all very varied across the different South

Asian countries and therefore, an average taken for the region as a whole can be

questionable if attempted. In such cases, individual country level analysis is

undertaken.

Since 1975, coinciding with various international efforts, most of the South Asian

countries have also intensified their respective country level endeavours to assess the

status of women, comprehend the nature of gender inequalities and introduce

institutional mechanisms to enable movement towards equality. By the end of the

twentieth century, gender equality and empowerment have become accepted norms in

any discussion on development. The gender-neutral approaches hitherto adopted

have been questioned by the recognition of the asymmetrical impact of development

and poverty on women and men. Gender inequality is a global phenomenon, with

variations only in terms of degrees of discrimination and biases against women

(UNDP, 1995).

quality refers to equal opportunities in terms of access to sources of livelihood, Ehealth, and education, as well as to social, economic and political participation

without discrimination. Gender inequalities stem from relations of power and

authority, class-religion-caste-ethnic hierarchies and socio-cultural traditions,

customs and norms (Kabeer, 1994; Carr, et al., 1996). Empowerment is the process of

transforming these structures and institutions, thereby ensuring equality.

Over the years, in a number of well being indicators, South Asian women are seen to

be better off today than they were a few decades ago- their survival in terms of life

expectancy has been improving; more women are educated and working; many of

them have entered politics at least at the local governance levels and there is an

increasing recognition of the need to address women's issues specifically, to

understand gender relations and work towards equality and empowerment for

women. Despite these improvements, the aggregate picture of women's development

reflected in the quantitative indicators in any of these spheres, reveals that the journey 4has only begun and there are many more processes that require transformation .

ollowing this introduction, section II focuses upon the issues relating to women's Fwork, its non-recognition and the nature of economic participation of the South

Asian countries. Predominance of male preference and the gender biases in nutrition,

and health care which impact the survival of girls and women, are dealt with in

section III. The overwhelming emphasis on women's reproductive roles to the utter

neglect of their other health concerns and its impact on their well-being is discussed

in the fourth section.

The educational poverty in most of South Asia, especially the gender biases prevalent

and the influence of socio-cultural constructs of women on their access to and

enhancement of capabilities is dealt with in the fifth section. The sixth section

provides for the role of women in South Asian politics. The inroads made by the

positive interventionist efforts of reservation for women and the need for it is

71 72

agriculture (see Table 2). In Sri Lanka, where agriculture is the main life supporting

sector for rural populations, women are involved extensively in the plantation sector

(Weerahewa and Ariyawardana, 2003). Rural women in South Asia participate in

crop farming, animal husbandry and a host of off-farm activities. A substantial

amount of time is spent by South Asian women in looking after livestock- from

rearing to protecting animals, finding and collecting fodder and water, collecting eggs,

milking, ensuring the health of animals, poultry, etc.

y and large, among the secondary sector activities of industry, manufacturing and Bso on, women's enumeration is low as seen in Table 2. Sri Lanka and Bangladesh

have a relatively higher share of women's employment in the secondary sector. Sri

Lanka began its phase of trade liberalisation and export oriented growth as early as

1977. The nature of these industries and the additional labour demand generated

therein facilitated entry of women workers. Bangladesh has recently embarked on

industry-led growth policies specially in such areas as garments. While this thrust has

led to South Asia becoming one of the world's largest exporters of textiles (with India,

Sri Lanka and Bangladesh), the work and pay conditions are no better than

sweatshops (see Unni, 2001).

The majority of South Asian women work in the informal sector or as unpaid family

helpers. Among the economically active women workers in India, 96 per cent are in

the unorganised sector. In Nepal, 75.3 per cent are self-employed and 28 per cent are

unpaid family members. In Pakistan, 65 per cent of the female labour-force that is

highlighted. Finally, some concluding remarks are made to emphasise the need for

working towards changing mindsets and perceptions that influence the institutional

structures and their functioning, towards elimination of gender inequalities in the

region.

II. Women's WorkWomen in South Asia- a predominantly agricultural and tradition-bound region-

participate in economic activities and contribute their labour actively. Yet, due to the

nature of their work- which is intertwined with household activities at times and is

often unpaid- and the flawed definition of economic activity, their economic

participation remains statistically invisible.

The role played by women in the care sector, predominantly their reproductive work

(bearing, rearing, nurturing children and household maintenance), falls outside the

national accounting systems followed by different countries. While these activities are

crucial for household members' well-being and effective participation in different

spheres- economic, social and political, they continue to remain non-economic

activities. By virtue of women performing these roles which are statistically not

counted as economic and hence not monetarily valued, women's roles and their

contribution are assigned a lower status.

Women's contribution in activities that are recognised by definition as economic

activities also remains unrecognised and non-enumerated. This is due to cultural and

traditional values which constrain recognition of women's economic participation. In

the South Asian countries, the historical gender roles, spaces and stereotypes of the

'public' male breadwinner (provider) and 'private' female care-giver are espoused even

under changing situations. This is due to the association of household status with

women's non-work that has been perpetuated by the circumstances of women having

to offer their labour in the paid market work spheres under extreme economic stress

and poverty.

espite the conceptual, methodological and definitional flaws, statistics on Dwomen's work from the respective national data sources reveal nearly one-third

participation of women in the labour-force. Maldives and Pakistan are the two

countries where the female percentage of labour-force is relatively low, while in

Bangladesh and Nepal the share of women labour-force is higher compared to other

countries in the region (see Table 1).

The region as a whole has been witnessing rising levels of women's economic

participation over the years. The factors that have aided or influenced these trends

differ from country to country. Nevertheless, the characteristics of women's labour, in

terms of the nature of tasks undertaken and the wages earned, remain by and large

unchanged. The majority of women are undertaking manual, non-mechanised, low or

unpaid tasks. Even among those entering the paid labour market, women face gender

discrimination in access to jobs, and gender inequalities in pay and job security.

An overwhelming majority of economically active women in Nepal and India work in


Table 1: Sectoral Distribution of Labourforce in South Asia

Country Percentage Labour Force in Percentage of Female Workers

Agriculture Industry Services India 62 11 27 32 Pakistan 47 20 33 27 Bangladesh 59 13 28 42 Nepal 93 1 6 40 Sri Lanka 49 21 30 36 Bhutan 92 3 5 32 Maldives 25 32 43 22

Source: HDSA, 1997, 2000.

Table 2: Sectoral Employment in South Asia by Sex (Percentage)

Country Sex* Agriculture Industry Service

Bangladesh

(1996)

Male

Female

53.9

41.7

19.2

27.8

26.8

30.5

India

(1994)

Male

Female

58.3

78.0

16.5

10.9

25.2

11.1

Nepal

(1996)

Male

Female

78.9

93.7

4.9

1.4

13.2

4.5

Pakistan

(1997)

Male

Female

40.7

66.4

20.2

10.6

39.0

23.2

Sri lanka

(1995)

Male

Female

35.4

41.5

28.2

30.8

36.4

27.7

*For each country male figures are percentages of male labourforce apercentages of female labourforce.

nd female figures are

Source: Respective labour force surveys of the countries; cited in HDSA, 2000.

74


73

population.

elatively balanced sex ratios are recorded for Sri Lanka and Nepal while RPakistan, India and Maldives have a lower proportion of females in their

populations (see Table 3). In India, where the sex ratios have been declining

especially among the younger age cohorts, practices of female infanticide and foeticide

to prevent the birth of girls have been noted in some parts of the country (see George,

et al., 1992; Agnihotri, 2000 among many others). The introduction and ease of

access to pre-natal screening methods such as ultrasonography and amniocentesus

technologies that can help detect the sex of the foetus are being used to selectively

abort female foetuses.

Analyses of the causes leading to such demographic imbalances, ever since these

trends were observed in South Asian countries, have exposed the strong son

preference traits. The trend of declining sex ratios witnessed despite reduction in

mortality rates has led researchers to examine other variables such as sex ratios at

birth, gender differentials in nutrition and extent of gender variations in mortality

rates among populations belonging to different age cohorts. Linkages have been

examined in many of the South Asian countries between fertility rates, contraceptive

use, abortion and sex preference even in Nepal and Bangladesh where the imbalance

is not so pronounced (Arnold, 2001; Karki, 1992; Leone, et al., 2003; Bairagi, 2001

among others).

he reasons for son preference stem from patrilineal and religious structures that Tlay emphasis on the role and significance of male offsprings. Property transfers,

ritual functions, the family heir who carries the name of the household etc., leads to

the desire of having one or more sons in every household. In the context of declining

fertility rates and smaller family size becoming desirable, the pressure to give birth to

a male offspring further worsens the condition of women's health and their status.

Frequent child bearing and the exposure of women's bodies to a host of tests take a

toll on their health. Since women are held responsible for childbirth, failure to

produce a male child becomes a cause for violence, abuse and torture against them.

Even when girls are born, they are discriminated against in a number of ways (UN,

officially enumerated is in the informal sector. The percentage of women earning a

living in the informal sector in Bangladesh in 1995-96 was 75 per cent (HDSA 2000).

Women workers are in demand for their docility, lower probability of organising or

fighting for better wages and work conditions. The patriarchal norms that are

prevalent make it easier to manage women as workers.

Women's participation, although increasing in South Asia, still accounts for the

smallest percentage of formal sector employment. Even here women occupy the

lower rungs of clerical and low-skilled occupations. The lower levels of literacy and

skill/training among women in South Asia are often blamed for their placement in the

lower echelons.

omen are often occupied in community, social and personal services. In India, W57 per cent of women in formal sector fall in this employment category, while

the share is 59 per cent in Bangladesh (see Table 2). Despite Sri Lankan women being

more professionally qualified, their higher labour market participation does not show

signs of breaking the proverbial 'glass-ceiling' and many of them are unemployed

(Jayaweera and Sanmugam, 2002; Aturupane, 1996; Alailima. 1998). To encourage

women's participation, some of the South Asian countries have introduced policies of

reservation in government jobs. In Bangladesh, 10-15 per cent and in Pakistan, 20 per

cent government jobs are reserved for women.

However, the extension of women's work spheres into paid categories without an

adjustment or radical change in the sharing of household responsibilities is an added

stress on them. Unless women have control over their earnings and the power to

decide how they spend their incomes, the benefits in terms of empowerment will

remain limited. Some studies have found that working women tend to spend their

resources more judiciously on children's nutrition and household concerns as

opposed to their male counterparts who are often noted to be frivolous by using their

incomes on commodities of personal gratification (Hoddinott, 1992; Kabeer, 1994).

At the same time it is important to note that women's work status certainly provides

them the opportunity to wield relatively more space within household structures,

especially when their income becomes important for the family and the fulfillment of

their needs are dependent on it. Even in terms of mobility that is otherwise restricted

for women in patriarchal societies, employment provides the desirable opportunity to

interact with others and operate in 'public' domains, traits which can be substantially

empowering in certain contexts. The recognition of women's economic 'worth' can

also help in improving the survival of girls.

III. Survival IssuesThe strong presence of traditional values and perceptions in South Asia, wherein the

role and status of women are assigned lower significance, reflects in the demographic

balance as well. As opposed to the global sex ratio of 106 women per 100 men, South

Asia is one of the few regions (other than China and parts of the Arab world) where

the proportion of women to men is lower- only 94 women per 100 men in the


Table 3: Survival Indicators for South Asia

Gross

Domestic

Product per capita

Country/Region Sex Ratio

(Females per

100 males)

Female Life

Expectancy at

Birth

Female Child

Mortality

Rate

Female to

Male Child

Mortality

Rate

4798 Maldives 93 66 80 1.51

3180 Sri Lanka 102 76 20 0.91

2840 India 94 64 97 1.18

1833 Bhutan 98 64 94 0.96

1610 Bangladesh 95 61 116 1.09

1310 Nepal 100 59 124 1.13

1890 Pakistan 92 60 104 0.96

2730 South Asia 94 - 99 1.14

Source: HDSA 2000; HDR 2003; for col.4 and 5 UNFPA, 1999.

75 76


The most significant decline in TFR is witnessed for Bangladesh, India and Sri Lanka

(see Table 4).

aternal mortality rates are quite high in the region (HDSA, 2000). The Mprobability of women not surviving childbirth is further aggravated by a large

proportion of them having non-institutional deliveries, unaided by skilled personnel.

Only 36 per cent of South Asian babies are born with the assistance of skilled

personnel (see Table 4). In Sri Lanka and Maldives, the situation is relatively better

compared to other South Asian countries.

The cultural basis of women's status and their perception of low self-worth in the

tradition-bound South Asian countries results in discriminatory practices beginning

from basic nutrition to accessing health care. HDSA, 1997 notes that half of the

children living in the region are malnourished, 260 million people lack access to

rudimentary health facilities and over 400 million go hungry every day.

The lack of adequate public health services acts as a constraint for women to access

such services (Baru, 2003; Gopalan and Shiva, 2000). Given the levels of poverty in

South Asia, home to nearly 40 per cent of the world's poor (HDSA, 1997), the

accessibility of private paid health services among women is likely to be limited, since

their needs are not considered to be important. There is very often excessive

concentration on reproductive health to the utter neglect of other health concerns of

women in government policies (see Qadeer, 1998; Datta, 2003). Other areas which

have not been researched adequately and lack data are women's mental health and

sexuality.

V. EducationThe importance of education for human development as well as women's

empowerment as a core dimension is well accepted, even in South Asia. Sri Lanka

and Maldives are among the best performing countries in the region. However, the

gender biases at higher educational levels, in professional courses or in non-

traditional subjects are visible even among these countries (Jayaweera and

Sanmugam, 2002; HDSA 2000).

The adult literacy rate (ALR) for the population above 15 years has been improving

Table 4: Some Health Indicators for South Asia Country/Region Total Fertility Rate % of Pregnant

Women with

Anaemia

Birth Attended

by Skilled

Personnel

Health Expenditure

as % of GDP

1970-75 2000-2005 Public Private

Maldives 7.0 5.3 62 70 6.3 1.3

Sri Lanka 4.1 2.0 60 97 1.8 1.9

India 5.4 3.0 72 43 0.9 4.0

Bhutan 5.9 5.0 73 15 3.7 0.4

Bangladesh 6.2 3.5 58 12 1.5 2.6

Nepal 5.8 4.3 75 11 1.6 3.6

Pakistan 6.3 5.1 45 20 0.9 3.2

South Asia 5.6 3.3 - 36 - -

Source: HDR 2003; HDSA 2000.

78

1998; Miller, 1981; UN Secretariat, 1988). Neglect and lack of adequate care in

feeding girls, looking after their nutrition and health, are noted in a number of studies

revealing the gender discriminatory practices in South Asia. These are mostly an

outcome of the lower status assigned to women (Basu, 1992).

mprovements in life expectancy and reduction of mortality rates are noted in all Ithe South Asian countries over the quarter century 1975 to 2000 (HDR 2003). Yet,

as compared to male child mortality rates, the female child mortality rates are higher

revealing excess female mortality among under-5 age groups. The female to male

ratio is above 1 in four countries - Maldives, India, Nepal and Bangladesh. By far the

best performance among the survival indicators is witnessed in the case of Sri Lanka

(see Table 3).

Consideration of three survival dimensions using sex ratios, child mortality and life

expectancy display discrepancies in ordering of different countries. Nepal has a more

balanced sex ratio, but the worst life expectancy and child mortality rates among

females.

The survival indicators seem to have a stronger association with the income levels of

the countries, especially the life expectancy and infant mortality levels. However, the

sex ratios and gender disparity in mortality do not display a similar correlation,

highlighting the influence of gender ideologies which discriminate against girls,

irrespective of income development levels of the countries.

IV. Health ConcernsThe overall lower status of women in South Asia influences their health status too.

Lack of access to resources, poor decision making power or control, low recognition of

their work i.e., low economic worth, and their social position as subservient to males

or other household members, places their health requirements at a low priority. In

fact, often these health needs are not realised or articulated by the women themselves.

Their low self-esteem and their socialisation into 'non-entities' prevent them from

such articulation.

The emphasis laid on women's marriage reiterates the stress on their reproductive

roles, undermining all other spheres of human development. In South Asian

countries, marriages are traditionally carried out at early ages with little choice/option

given to women. The governments of most South Asian countries are actively working

towards preventing child marriages and pushing the minimum age at marriage up for

girls. Bangladesh, India and Bhutan have stipulated the legal minimum age at

marriage at 18 years, yet many marriages do occur before girls attain the legal

minimum age. (HDSA, 2000).

arly marriage along with young age pregnancies compounded by poor health and Eeconomic poverty puts undue stress on women's bodies (Hartmann and

Standing, 1989). A majority of South Asian pregnant women suffer from anaemia

(see Table 4). The total fertility rate (TFR) has been declining over the last three

decades, but still continues to be quite high in Maldives, Pakistan, Bhutan and Nepal.


77

over the years. Even over the last decade from 1990 to 2001, ALR has increased from

48 to 56 (see Table 5). However, this rate is low compared to even developing

countries, where the ALR was 75 per cent in 2001. The literacy rate for the youth

(refers to population in the age cohort of 15 to 24 years) in all South Asian countries

shows positive trends, reflecting inter-generational improvements. In South Asia, the

youth literacy rate is 71 per cent.

here is a definite improvement in literacy levels among females across South TAsian countries. Some countries, such as Maldives and Sri Lanka have achieved

remarkable literacy levels among females. Gender disparity levels both in literacy and

enrolment ratios are negligible in these two countries (see Table 6). However, gender

gaps in literacy are high in Nepal, Pakistan, and India.

he one statistic which poses a cause for concern in the South Asian context is the Tlarge proportion of women among illiterates. The tradition based stereotypes

and role demarcation for women are strongly prevalent in most South Asian

countries. Given the social ordering along patrilineal- patrilocal families, women are

married out and investing in their education is not perceived as a priority. Among

resource constrained households, often educational costs are strategically borne for

the male child while depriving the girl sibling (Khan, 1993). The role of women is

associated with their reproductive functions, to the detriment of their own personal

and educational development as human beings. These attitudes and perceptions

based on socio-cultural and economic factors constitute the demand side constraints

to women's education.


Table 5: Adult and Youth Literacy Rates for South Asia 1990 and 2001

Country/Region

Adult Literacy Rate %

(15 years and above)

Youth Lit eracy Rate %

(15-24 years)

1990

2001

1990

2001

Maldives

94.8

97.0

98.1

99.1 Sri Lanka

86.7

91.9

95.1

96.9 India

49.3

58.0

64.3

73.3 Bhutan

-

-

-

-

Bangladesh

34.2

40.6

42.0

49.1

Nepal

30.4

42.9

46.6

61.6

Pakistan

35.4

44.0

47.4

57.8

South Asia 47.7 56.3 61.7 70.6 Developing Countries 67.2 74.5 81.1 84.8

Source: HDR 2003.

Table 6: Adult Literacy Rate and Gross Enrolment Ratio by Gender

Source: HDR 2003; Gap calculated from Col.1 and 2.

Country

Adult Literacy Rate

Gender Gap

Gross Enrolment Ratio

Female

Male

Female

Male

Maldives 96.9 97.1 0.2 79 78 Sri Lanka 89.3 94.5 5.2 64 63

India 46.4 69.0 22.6 49 63

Bangladesh 30.8 49.9 19.1 54 54

Nepal 25.2 60.5 35.3 57 70

Pakistan 28.8 58.2 29.4 27 45

On the supply side, factors such as inadequate investment, lack of infrastructure,

schools, teachers (especially female teachers) etc., reflect the state's commitment and

impinge on the levels of accessability. In most of the countries of South Asia, average

years of schooling are quite low- 6 years for girls and 8 years for boys.

n an effort to improve this situation, a number of countries in the region have Istressed upon free and compulsory primary education and put emphasis on

enrolment and retention of girls in schools. Various incentive schemes such as

scholarships for girls, free school meals (in India, Bangladesh and Nepal) and

separate schools for girls in each Thana (Bangladesh) have been started (HDSA

2000). Efforts have also been made to increase female teachers in schools.

There is still a long way to go to achieve universal literacy goals and eliminate gender

discrimination in these societies. The effort will have to be on both ends- at the state

level to ease supply side constraints based on local knowledge of the nature of gender

specific inequalities that are prevalent, and at the household or social level to tackle

the demand side hurdles posed for women's educational attainments.

VI. Political ParticipationThe region of South Asia has had the largest number of women leaders who have been

heads of the nation (Indira Gandhi, Sheikh Hasina, Benazir Bhutto, Srimavo

Bandaranaike and Chandrika Kumaratunga). The first female head of any nation in

the world, as early as in 1960, was from South Asia, in Sri Lanka. The general level of

political participation among the South Asian women does not reflect similar trends.

Even in pockets where the political awareness among women may be higher, their

actual participation is often limited by the constraints laid on their mobility and roles

based on the socio-cultural perceptions. Therefore, in spite of the visibility of women

at the higher echelons of government, the overall public participation of women

remains low for the region (see Table 7). There is no data on female membership for

most political parties and only a few of them are given tickets to stand for elections.

The experience of India's amendment to its Constitution (the 73rd and 74th

Amendments introduced in 1992), reserving one-third seats for women in its local

governance structures, generated tremendous interest in the other countries of the

region. In 1997, both Nepal and Bangladesh introduced women's reservation in local

bodies. While it was 20 per cent in Nepal, in the case of Bangladesh it was one-third

seats in all four tiers of local government. In Pakistan also, one-third seats are

reserved in local bodies, which is visible in the current figures of women's political

participation.

s an outcome of women's movements in many of the South Asian countries, the Ademand for positive intervention in the form of reservation of seats for women in

the governance structures, has been met to some extent. This policy has clearly

assisted women's participation, which would have been denied given the deep-rooted

patriarchal traditions wherein men wield power.

79 80


development indicators, work, employment and institutions; and crimes against

women).

End Notes1. One useful outcome of the UNDPs efforts at the global and regional levels to bring out the

Human Development Reports (HDRs) since the 1990s, especially the Human Development

in South Asia (HDSA) ever since 1997, is the availability of data from different sources in

one document. Most of the data used here are from these documents.2. The countries included here are the 7 SAARC members: India, Pakistan, Bangladesh,

Nepal, Sri Lanka, Bhutan and Maldives.3. Only among few of the communities in the region where matriliny is practiced, women

have control over land and economic property through inheritance; for instance, in Bhutan

80 per cent of the population follows matriliny. Similarly parts of Kerala and northeast

region in India also follow matrilineal property transfers.4. The Human Development Reports published by UNDP notes this region as one of the worst

in the world as per the gender related development levels (HDR, various years; HDSA,

2000).

BibliographylB. A Field of One's Own, (Cambridge: Cambridge University Press 1996).lS.B. Agnihotri, Sex Ratio Patterns in the Indian Population - A Fresh Exploration, (New

Delhi: Sage, 2000).lPatricia Alailima, 'The Situation of Women: Employment, Unemployment and

Underemployment,' in Women in the Economy, Centre for Women's Research, Colombo,

Working Paper no. 12 1998.lFred Arnold, 'Son Preference in South Asia', in Sathar and Phillips (eds.), Fertility

Transition in South Asia, 2001, pp. 281-299.lHarsha Aturupane, Unemployment among Educated Women in Sri Lanka, (Colombo:

Department of National Planning, 1996).lRadheshyam Bairagi, 'Effects of Sex Preference on contraceptive Use: Abortion and

Fertility in Matlab, Bangladesh,' International Family Planning Perspectives, 2001, vol.

27(3), pp. 137-143.lKalpana Bardhan, 'Women: Work, Welfare, and Status: Forces of Tradition and Change in

India', South Asia Bulletin, 1986, vol. 6(1), pp. 3-16.lRama V. Baru, 'Privatisation of Health Services - A South Asian Perspective', Economic

and Political Weekly, 2003, vol. 38(42), pp. 4433-37.lA.M. Basu, Culture, the Status of Women and demographic Behaviour, (Oxford:

Clarendon Press, 1992).lNirmala Buch, 'Women's Experience in New Panchayats: The Emerging Leadership of

Rural Women', Occasional Paper No. 35, (New Delhi: Centre for Women's Development

Studies, 2000).lJohn Caldwell, Theory of Fertility Decline, (London: Academic Press, 1982).lM. Carr, Martha Chen and Renana Jhabvala (eds.), Speaking Out: Women's Economic

Empowerment in South Asia, (New Delhi: Vistaar Publications, 1996).lAlice Clark, 'Social Demography of Excess Female Mortality in India: New Directions',

Economic and Political Weekly, 1987. vol. 22(17): WS 12-21.lAnindita Datta, 'Articulation of an Integrated Women's Health Policy Using the Life Cycle

Approach', Indian Journal of Gender Studies, 2003, vol. 10(1), pp. 25-43.lSabu George, Rajarathram Abel and B.D. Miller, 'Female Infanticide in Rural South India',

Economic and Political Weekly, 1992, vol. 27(22): pp. 1153-1156.lSarla Gopalan and Mira Shiva, National Profile on Women, Health and Development,

Voluntary Health Association of India compiled for WHO, August 2000.lB. Hartmann and H. Standing, The Poverty of Population Control: Family Planning and

Health Policy in Bangladesh, (London: Bangladesh International Action Group, 1989).

Agarwal,

82

Prior to the phase of recognising the need for reserving seats for women, there was an

assumption about women's passivity regarding their interest in, and understanding

of, political matters. Subsequent to the amendments and provisions being made, the

debates have focused extensively on the inabilities of women, given their illiteracy and

lack of understanding regarding political matters (Mazumdar, et al., 2001). In India,

as elsewhere, there is substantial propaganda against such reservation on the pretext

of misuse (Buch, 2000; ISS, different years). Women also face a backlash in the form

of violence, since they are seen as altering the power equation and challenging the

status quo.

VII. Concluding RemarksThe situation of South Asian women as seen by the set of quantifiable indicators of

gender development reflects the improvements being made in a number of spheres

with regard to work, mortality, health, education and political participation. The

constraints faced by women in South Asia are not merely economic or poverty related

but emphasise the prevalence of deep-rooted gender ideologies that operate through

various institutions and prevent women from enjoying an equal status in different

spheres of their lives.

Among the many efforts being made at international, regional and national levels to

move towards gender equality, the highlighting of the levels of biases that prevail

through the use of human development indicators, is one prominent tool. This

provides insights into the specific approaches required to address the gender

discrimination experienced by women and can help in the process of policymaking.

he added dimension to be noted is that of the nature of gender inequalities which Tare rooted in the structures and institutions, and these aspects are not always

amenable to quantification. The perceptional and attitudinal biases against women

operational in the social context, as well as in the market and state institutions, need

to be identified, understood and appropriately tackled. Along with generating

awareness regarding gender issues, efforts need to be made in the direction of

generating appropriate data for analysing women's development in a more useful

manner.

(Dr Preet Rustagi is Junior Fellow at the Centre for Women's Development Studies, New

Delhi. Her research interests include gender and development issues, gender


Table 7: Women in Parliament (%)

Country/Region

Percentage Women

Maldives

6.0 Sri Lanka

4.4

India

9.3

Bhutan

9.3

Bangladesh 2.0 Nepal 7.9 Pakistan 20.6

Source: HDR 2003.

81

lHDSA, Human Development in South Asia, Mahbub-ul-Haq Human Development Centre,

(Karachi: Oxford University Press, 1997-2002).lJ. Hoddinott, 'Household Economics and the Economics of the Household'. Paper

presented at the IFPRI/ World Bank Conference on Intra-Household Allocation, IFPRI,

Washington, 12-14 February, 1992.lISS, Women and Political Empowerment Series, New Delhi: Institute of Social Science,

1995-2001.lSwarna Jayaweera (ed.), Women in Post-Independence Sri Lanka, (New Delhi: Sage,

2002).lSwarna Jayaweera and Thana Sanmugam, Graduate Employment in Sri Lanka in the

1990s, (Colombo: Centre for Women's Research, 2002).lNaila Kabeer, Reversed Realities - Gender Hierarchies in Development Thought, (New

Delhi: Kali for Women, 1994).lY.B. Karki, 'Sex Ratio in Nepal,' Economic Journal of Nepal, 1992, vol. 15(1), pp. 30-37.lShahrukh R. Khan, 'South Asia' in Elizabeth M. King and M. Anne Hill (eds.), Women's

Education in Developing Countries: Barriers, Benefits and Policies, (Baltimore: John

Hopkins University Press for the World Bank, 1993), pp. 211-246. lTiziana Leone, Zoe Mathews and Gianpiero Dalla Zuanna, 'Impact and Determinants of

Sex Preference in Nepal,' International Family Planning Perspectives, 2003, vol. 29(2), pp.

69-75.lMadhuri Mathema, 'Women in South Asia: Pakistan, Bangladesh, and Nepal' in Stromquist

(ed.), 1998.lMazumdar, et al. 'Gender and Governance - India country paper', Centre for Women's

Development Studies, 2001.lBarbara D. Miller, The Endangered Sex: Neglect of Female Children in Rural North

(India, Ithaca and London: Cornell University Press, 1981).lImrana Qadeer, 'Reproductive Health - A Public Health Perspective', Economic and

Political Weekly, 1998, vol. 33(41), pp. 2675-84.lZeba Ayesha Sathar and James F. Phillips (eds.), Fertility Transition in South Asia, (New

York: Oxford University Press, 2001).lNelly P. Stromquist (ed.), Women in the Third World - An Encyclopedia of Contemporary

Issues, (New York and London: Garland Publishing, 1998).lUN Secretariat, 'Sex Differentials in Survivorship in the Developing World: Levels,

Regional Patterns and Demographic Determinants', Population Bulletin of the UN, 1998,

vol. 25: pp.51-64.lUNDP, Human Development Report, United Nations Development Programme, (New

Delhi: Oxford University Press, 1990-2003).lUNFPA, The State of the World Population, New York: UNFPA, 1999.lJeemol Unni, 'Gender and Informality in Labour Market in South Asia', Economic and

Political Weekly, 2001, vol. 36(26), pp. 2360-77. lJeevika Weerahewa and Anoma Ariyawardana, 'Impact of the WTO on Women Workers in

Sri Lanka, in Veena Jha (ed.), Trade, Globalisation and Gender - Evidence from South

Asia, UNIFEM in Collaboration with UNCTAD, (New Delhi: UNIFEM, 2003).


India-Pakistan Trade S. Akbar Zaidi

IntroductionIndia and Pakistan are both low income countries and are amongst the poorest and least

developed nations of the world. They are also two of the seven countries which have

openly undertaken nuclear testing and consider themselves to be nuclear powers. Add to

this the fact that the two neighbours have fought at least two full-fledged wars- with

Pakistan losing its more populous wing as a consequence- and numerous other battles

and skirmishes from as early as a year after independence and as recently as less than five

years ago in 1999. They have a history wrought with difficulties and distrust and a future

which threatens far worse. The worst fear, not just of residents of the two countries but of

the region and the world, is that irresponsible governments in both, or either country,

could resort to the extreme measure of using nuclear weapons against one another.

This article proposes a different path to normalisation of ties between India and

Pakistan keeping in mind that different and conflicting stands and claims on Kashmir

are the biggest, or perhaps the only, stumbling block to normalisation of ties between the

two countries. Since it is unlikely that the Kashmir issue is going to be resolved to

anyone's liking in the near future, the argument is that, rather than Kashmir hold the 1.4

billion people of India and Pakistan hostage, it is perhaps important to make headway in

other directions, which may eventually also have a positive impact on the impasse over

Kashmir. Partial normalisation in other areas can still take place despite the continuing

disagreements and conflicts over Kashmir.

he route towards better relations between India and Pakistan is open trade between Tthe two countries. The paper argues that there is no economic rationale and

justification for either of the two countries not to trade with each other, especially in an

era of globalisation and liberalisation and after the setting up of the World Trade

Organisation, of which both countries are members. Not only are there large trade-

related advantages to governments and consumers in both countries, but positive

exogenous factors are also likely to emerge as a result. The most important argument in

this paper is that, given Pakistan's relatively weaker economy, especially compared to

India's, it is in Pakistan's interest far more than it is India's, to have normal trade

relations with each other.

1Trade Logic with IndiaPakistan and India have been trading with each other since 1947 and, in the last 57 years,

trade has come to a complete halt for only nine years- between 1965-74. However,

despite a largely uninterrupted trade regime since 1974, the extent of trade between

India and Pakistan is limited and almost negligible as Table 1 shows. Rajesh Chadha and

Devender Pratap- using figures only for legal trade- show that:

83 84

Table 2: Pakistan's Total Trade + Trade with India 1992-2002 (in US$ million)

Source: State Bank of Pakistan, Annual Report, various years, Karachi.

lthough much is made of the rather limited volume of trade between India and

Pakistan, a number of points, especially from the Pakistani angle, have been Aoverlooked. Firstly, the quantum of official trade between the two countries of between

US$ 200-300 million needs to be supplemented with illicit trade between the two

countries and the trade of goods which originate in either country but are imported

through a third country. This recalculation increases the total trade between the

countries by a factor of four or five. This is a significant increase, especially when one

considers the fact that already, for Pakistan at least and using the official bilateral trade

figures alone, India is the main trading partner in the SAARC region. A new set of figures

would further enhance that dominance. Compared to Pakistan's neighbours-

Afghanistan, Iran, and China- trade with India is far greater than the former two, and

with the new set of figures, India comes a close second to China. Clearly, despite an

unfavourable trade, economic and political environment, there is already substantial

trade between Pakistan and India which has even greater economic possibilities.

erhaps the most curious fact about Pakistan's trade with India is this assumption Pthat it is so low. Certainly official figures, as we show in Table 2 above, do enforce

that perception, but even if we limit ourselves to these official figures, some rather

interesting observations emerge. For example, in recent years, when imports from India

have ranged from US$ 145 million in 1998-99 to US$ 235 million in 2000-01 and to US$

187 million in 2001-02, India emerges as Pakistan's 16th biggest trading partner in terms

of imports. This figure is more interesting since the four largest importers into Pakistan

are oil-exporting countries (Saudi Arabia, UAE and Kuwait) and Malaysia which exports

mainly palm oil to Pakistan. Despite hostilities, wars and diplomatic breakdown,

Pakistan imports (based only on official figures, which are perhaps a third of actual

volume) more from India than it does from France, Canada, Switzerland, the

Netherlands, Turkey, Iran or even Thailand!- most interesting given the political

relations between the two countries. In terms of total trade, exports and imports based

on the under-reported 'official' trade between the two countries, India ranks 21st as

Pakistan's trading partner. Clearly the possibilities of gains from opening trade are

tremendous, especially if we look at the nature of trade between the two countries.

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

Total

Export 6819 6812 8141 8707 8323 8627 7779 8568 9201 9134

Import 9963 8561 10401 11804 11894 10118 9431 10309 10728 10339

India

Export 83 42 42 41 36 89 175 54 55 49

Import 67 70 64 95 197 153 146 127 235 187

86

While about 4.5 per cent of India's total exports are directed to South Asia, the figure is 3 2per cent in the case of Pakistan . Exports to Pakistan constitute about 8 per cent of India's

total exports to South Asia. Pakistan's exports to India have a higher average share of

about 40 per cent, during 1998-2000, of Pakistan's total exports to South Asia compared

with an average share of about 17 per cent during 1995-1997. In the case of imports, 0.8

per cent of India's imports originate from South Asia and the figure is 0.5 per cent for

Pakistan. Within India's imports from South Asia, 36 per cent originate from Pakistan.

Pakistan sources 69 per cent of its total South Asian imports from India. Clearly, India

and Pakistan are two major trading partners among the South Asian countries despite 3all hurdles .

However, there is no India-Pakistan trade agreement and Pakistan allows only a handful

of commodities to be imported from India, which have, nevertheless, increased over the

years. In 1996, 615 items were permissible for trade, although 90 per cent of the trade 4took place in only 42 items ; in April 2003, following the peace initiative by the Indian

5Prime Minister, the Pakistani Prime Minister increased the number of tradable items .

While the South Asian Free Trade Area (SAFTA) agreement will, by 2006, open doors to

further trade between the two countries, India-Pakistan trade should take place before

the agreement comes into effect, and should go well beyond the guidelines set by the

agreement.

here are some curious facts about trade between India and Pakistan which need to Tbe highlighted (see Tables 1 and 2). Firstly, open, formal (legal) trade between the

two countries is very small, and in the last decade has varied between a low of US$ 106

million in 1994-95 which was a mere 0.6 percent of Pakistan's total trade that year, to a

high of US$ 321 million in 1998-99 or 1.9 percent of Pakistan's total trade. Clearly the

volume and scale of trade between the two countries is very small in absolute terms and

as a percentage of the total trade of both countries. However, given the political history of

the two countries- with many wars and consistently poor diplomatic relations affecting

trade and economic cooperation- it is believed that third-country trade and smuggling

increase the volume of trade from anywhere between US$ 1-1.5 billion, still a small

number, but of somewhat more significance, particularly for Pakistan's smaller

economy.

Table 1: India Pakistan Trade 1990-2000 (max and min range, in %)

Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More Butter

and Less Guns', unpublished mimeograph, New Delhi, 2003.

Share of India's total Exports, 1990-2000: 5.1to South Asia: 2.7-

to Pakistan: 0.2 -- 0.4

Share of India's total Imports, 1990-2000: from South Asia: 0.4-0.8

from Pakistan: 0.2-0.6

Share of Pakistan's total Exports, 1990-2000: to South Asia: 2.6 - 4.9

to India: 0.4 - 2.4

Share of Pakistan's total Imports, 1990-2000: from South Asia: 0.4 -1.7

from India: 0.2- 0.6

85


n the decade 1990-2000, Pakistan has had a trade surplus with India in only three of

these ten years, importing far more than it exports. Most of Pakistan's exports to India I

2001-02 2000-01

Total Imports Rs 11,471,155 Rs 13,928,480

% %

Agriculture and Food

(Sugar)

16

(10)

53

(39)

Iron and manganese ore 9 6

Chemicals

(Pure Xylenes)

38

(17)

21

(1)

Medicinal inputs 4 2

Plastics 8 4

Tyres and Rubber 7 4

2001-02 2000-01

Total Exports Rs 3,246,436 Rs 2,777,405

% %

Agriculture and Food

(Dates)

(Rice)

66

(42)

66

(35)

(23)

Asafoetida 5 -

Crude Petroleum - 8

Cotton staple - 10

Cotton yarn and related

(Cotton tents)

18

(12)

5

(-)

transaction costs are also lowered and such trade 'facilitates the flow of ideas and 12knowledge that strengthen international competitiveness'. The study looks at a number

of sectors in the Pakistan economy and concludes that 'the economic benefits of 13liberalising trade with India outweigh costs'. Consumers in Pakistan will benefit

'unambiguously' because of lower prices, and the government will get far greater revenue

from legalising the existing illicit border trade. Moreover, 'important segments of

producers would also benefit because of increased competitiveness and market access to 14a much larger Indian economy'.

study by the Karachi Chamber of Commerce and Industry endorses the idea of Atrade with India on the grounds that now, having signed the agreements which have

led to the setting up of the World Trade Organisation, all signatory members have to be

treated equally, and understands that giving the Most Favoured Nation (MFN) status to

India 'is not a special favour to India, but an obligation under WTO and an economic and 15geopolitical imperative'. In this new world order, Pakistan has to face competition from

all countries, including India, and hence 'instead of shying away, we should be well

prepared to face the eventuality. In any case, salvation lies in streamlining of operations 16and upgrading of technology which was long overdue'. This study presents a sector-wise

analysis of trade with India and shows the impact on each sector, looking at numerous

aspects including what it calls 'silver linings'. For example, it feels that while the opening

up of trade with India is likely to affect the engineering sector, cheaper steel and iron ore

imports from India, will have a positive impact overall and 'will result in the reduction of 17 very high inventory costs of the engineering sector'. However, the main argument which

this report seems to be making is that Pakistan trades with almost every country in the

world, so why not with India?

There is also the important issue of the impact of globalisation. All countries of the world

are affected by it, some favourably and others not so favourably. To take further

advantages or to protect themselves from the negative impacts of globalisation, many

neighbouring countries have established trading blocs and currently around 60 per cent

of world trade takes place through regional trading arrangements. There are huge

advantages and benefits to such regional trading arrangements, yet, 'South Asia is the 18only major world region not to move towards regional cooperation and integration'.

Clearly, normalisation of trading ties between India and Pakistan should be seen as a first

step to such trading arrangements. As Burki argues, 'our policy-makers must be

cognisant of the fact that the world is organising itself into a number of regional 19arrangements and we in Pakistan cannot afford to be left out of them'.

ll discussion on trade between India and Pakistan is limited by a host of factors Awhich makes conclusive analysis difficult. Firstly, no one really knows how much of

unofficial (smuggled) and third-country trade actually takes place, so even figures of

US$ 1-1.5 billion are open to debate; we really don't know. Secondly, and perhaps more

importantly, much of the analysis on improving trade relations between the two

countries is based on a static analysis which is based on the very limited existing trade

patterns. No one really knows the true potential of trade between India and Pakistan

87 88


trade is unlikely to make matters much worse. Trade with India, in this regard, is a win-

win situation.

(S. Akbar Zaidi is the Executive Editor, South Asian Journal and an independent

Karachi-based social scientist).

End Notes1. Much of this paper draws from the following sources: E. Sridharan, 'Economic Cooperation

and Security Spill-Overs: The Case of India and Pakistan', in Michael Krepon and Chris Gagne

(eds.), Economic Confidence-Building and Regional Security, The Henry L Stimson Centre,

Report No 36, Washington, October 2000; S. Akbar Zaidi, 'Economic Confidence Building

measures in South Asia: Trade as a Precursor to Peace with India', in Moonis Ahmar, (ed.), The

Challenge of Confidence Building in South Asia, (New Delhi: Haranand Publications, 2001);

Rajesh Chadha and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More

Butter and Less Guns', unpublished mimeograph, New Delhi, 2003, and S. Akbar Zaidi,

'Pakistan's Development Options: Does India Matter At All?', Paper presented at the

Deterrence Theory and South Asia workshop, as part of the University of Pennsylvania

Institute for the Advanced Study of India project International Relations Theory and South

Asia: Towards Long-range Research on Conflict Resolution and Cooperation-building, New

Delhi, August 26-27, 2003, to be published in a collection of essays shortly.2. Average for three years, viz. 1998-2000.3. Chadha and Pratap, op. cit., 2003.4. Government of Pakistan, Ministry of Commerce, Pakistan-India Trade: Transition to the

GATT Regime, Islamabad, September 1996. 5. Some countries have a negative list for traded goods, i.e., they import all commodities except

those which are on this negative list, as does Pakistan when it imports from most countries. In

the case of India, however, Pakistan only allows import of items on this 'positive' list.6. E. Sridharan, op. cit., p. 97.7. Government of Pakistan, op. cit., p. 3.8. Sridharan, op. cit., p. 68.9. Ibid., p. 70.10. Ibid., p. 89.11. Ibid., p. 89.12. Government of Pakistan, Ministry of Commerce, Pakistan-India Trade: Transition to the

GATT Regime, Islamabad, September 1996, p. 1.13. Ibid., p. 2, emphasis added.14. Ibid., p. 2.15. Karachi Chamber of Commerce and Industry (KCCI), Freer Trade With India: Its Raison

d'etre and Impact, Research and Development Cell, KCCI, Karachi, March 1996, p. 1.16. Ibid., p. 3.17. Ibid., p. 5.18. Shahid Javed Burki, 'The Themes to be Explored', Dawn, Karachi, January 23, 2001.19. Ibid.20. Government of Pakistan, op. cit., p. 16.21. Ibid., p. 16.22. E. Sridharan, op. cit., p. 76.

90


because so far most of the trade takes place in a very small handful of commodities. Free

'normal' trade between India and Pakistan allows thousands of goods, which have so far

not been traded, to come into the market of both countries. For example, the talk about

two pipe and gas lines from Turkmenistan and Iran to India resulting in gains to both

Pakistan and India, may materialise once talks resume and political conditions improve.

Although it is difficult to say how much Pakistan will gain from royalties and by laying

the pipelines- royalty figures, though unreliable, are being quoted at US$ 500 million

each year for each of the pipelines- if true, they could eventually be equivalent to as much

as 5 percent of Pakistan's export earnings, no mean figure to scoff at. Moreover, with

lower transportation costs, there is likely to be some import 'switching' as well, where

goods previously imported from other countries may now be imported from India. Trade

between India and Pakistan will bring down the cost of business (particularly for

Pakistan), enhance the purchasing power of consumers and increase government

revenue. The volume and variety of tradable goods, given a period of time, can be

extraordinary.

Trade with India might not radically alter Pakistan's economy for the better (and the

fears that Pakistan's India will be swamped by cheap Indian goods are also

unwarranted), but there are likely to be numerous positive externalities which can

accrue from opening up trade by Pakistan with India.

umerous small industries are likely to benefit from cheaper raw materials from NIndia and may help address the problem of some of our sick industries. This is

likely to have an employment-enhancing effect. Moreover, many of Pakistan's industries

will benefit from increased competitiveness and will have to become more efficient in

light of international and Indian imports. Also, greater market access of Pakistani

exports should be beneficial. As we have argued above, consumers in Pakistan are going

to benefit by cheaper Indian imports as well. As the Ministry of Commerce study argues,

'exposure to competition from a neighbour would encourage policy makers as well as the

private sector in Pakistan to focus more sharply on the investments needed to strengthen 20Pakistan's international competitiveness' . Moreover, the report continues, 'the fear of a

deluge of Indian products in the Pakistan market after liberalising trade is much

exaggerated. This has not happened in the past when trade has been liberalised and is

unlikely to happen in the future, given Pakistan's global orientation in trade and the 21quality conscious Pakistani consumers' . Also, the arguments by E. Sridharan and by the

Government of Pakistan that 'it is unrealistic to visualise either country, particularly 22India, having a large impact on the total trade of the other' , do not examine the

possibilities for presently non-tradables coming into the trade orbit.

hile trade can be a component of broader Confidence Building Measures (CBMs) Wand an improvement in the overall atmosphere between these two neighbours,

micro level linkages and opportunities, particularly in Pakistan's Punjab and the NWFP,

may pay higher dividends. In terms of the broader political economy factors, trade

normalisation is likely to improve the overall atmosphere in which India and Pakistan

address all contentious issues. Even if there are no substantive improvements in

Confidence Building Measures between the two countries on account of trade, improved

89


India: State of the EconomyDr Rajesh Mehta

I. IntroductionIndia had followed the system of a control-and-command economy since 1951, based

1on the development policies as outlined in its Five-Year Plans . This continued for

almost three decades. The principle objectives, among others, were: (a) to increase

aggregate consumption, (b) to reduce unemployment, (c) to work towards self-

reliance and self-sufficiency and (d) reduction in disparities. The priority of these

objectives changed from plan to plan. To quote an example, India's Fifth Five-year

Plan of 1974-79 outlines: 'Removal of poverty and attainment of self-reliance are the

two major objectives that the country has set out to accomplish in the Fifth Plan. As

necessary corollaries, they require higher growth, better distribution of incomes and a

very significant step-up in the domestic rate of saving' (c.f. Government of India,

1974).

The Indian economy since 1991 has been undergoing constant and drastic economic

reforms. These reforms have resulted in a shift from the inward-oriented policy of the

past to an outward-looking one. Although this process of reform had started in the

mid-1980s, it suffered interruptions a few times owing to an over-cautious approach

and several other factors. It was only in the early 1990s that the process was

accelerated. The reforms had to take care of various short-term macro-economic

(particularly fiscal and external) imbalances as well as integrate the domestic

economy increasingly with the world through deregulation and competition. Although

the reforms were driven by a macro economic crisis, they have been sustained for over

a decade. The major emphasis of these reforms was to attain higher growth and

efficiency. In a democratic country with a federal system, this was sought to be

attained through a wide consultation process to achieve social and political consensus.

The approach to India's reform program was gradual and steady rather than of a

'shock therapy' as was carried out in Latin America or in the East European

economies.

he main objective of this paper is to review select features of the present state of Tthe Indian economy. Section II of this paper summarises the changes in India's

development perspective/strategies. It also gives a brief summary of India's economic

reforms during the 1990s. With the institutions of structural reform, the different

policies began to be operated under the open macro economic framework. Section III

compares some select macro economic indicators like output growth, composition of

output, saving and investment rates during the pre and post reform period. Section IV

gives a brief summary of changes in some welfare indicators like 'people below

poverty line' and 'rate of unemployment'. Section V reviews the changes in India's

91 92

upon the performance of the private sector and our policies must therefore provide an

environment, which is conducive to such growth. …' (cf Government of India,

(2002b), Vol. I, pp 7.)

III. Macroeconomic DimensionsOutput

Box 1: Paradigms of Economic Reforms in India Since 1991

Pre-Reforms Period Post-Reforms Period

1. Quantitative licensing on trade and industry. 1. Abolition of industrial and trade licensing.

2. State regulated monopolies of utilities & trade. 2. Removal of state monopolies, privatisation & divestment.

3. Govt. control on finance & capital markets. 3. Liberalisation of financial & capital markets.

4. Restrictions on foreign investment and technology. 4. Liberal regime for FDI, portfolio investment, foreign technology.

5. Export promotion and export diversification. 5. Import substitution and export of primary goods, No import bias.

6. High duties & taxes with multiple rates. 6. Reduction and rationalisation of taxes and duties dispersion.

7. Sector-specific monetary, fiscal and tariff policies. 7. Sector-neutral monetary, fiscal and tariff policies.

8. End-use and sector-specific multiple interest rates. 8. Flexible interest rates without any end -use or controlled interest rates sector specifications.

9. Foreign exchange control, no convertibility of rupee. 9. Abolition of exchange control, full convertibility on current account.

10. Multiple and fixed exchange rates. 10. United and market determined exchange rates.

11. Administered prices for minerals, public utilities. 11. Abolition of all administered prices essential on goods except for few strategic sectors.

12. Tax concessions on exports and saving..s 12. Rationalisation of structure, and concessions being phased out.

13. Explicit subsidies on food, fertilizers, and some strategic sectors.

13. No significant change, budget subsidies on LPG essential items and kerosene introduced.

14. Hidden subsidies on power, urban transport. 14. No significant change.

15. General lack of consumer protection and other rights. 15. Acts governing consumer rights, Intellectual Property Rights, independent other rights regulatory authorities and other.

16. Central planning, discretionary process - high. 16. Decentralisation, sound institutional framework, degree of civil service reforms..

17. Outdated Companies Act. 17. No change.

18. No exit policy for land and labour. 18. No change in labour policy, slow progress of reforms in land markets.

19. Outdated legal system. 19. No change.

Source: Das (2003)

94

trade policy reforms and their implication on India's imports and exports. Some select

concluding remarks are given in Section VI.

II. Development Policy PerspectiveThe trend towards a liberal economic policy had found its full expression in the early

1990s with the Government of India announcing a series of packages of stabilisation

and structural policy reforms. This was certainly a major departure from the

relatively protectionist economic policies pursued till the early 1980s. Such a break

was a result of a change in the perception of the economic policy mind-set in the

country. While the objectives of self-reliance and self-sufficiency had influenced

economic policy formulation in the 1950s and 1960s, factors like export-led growth,

improving the efficiency and competitiveness of Indian industries prevailed upon

economic policy-making during the late 1970s and the early 1980s. The current

economic policy reforms, on the other hand, seem to have been guided mainly by

concerns regarding the globalisation of the Indian economy, improving internal and

external competitiveness, private sector participation and removal of inadequacies or

constraints.

Macro stabilisation policies were achieved through corrections in fiscal, financial,

monetary and exchange rate imbalances, which were not being sustained. These

policy changes were accomplished by structural reforms in the form of industrial

deregulation, trade and tariff policies, increasing opportunities for foreign direct

investment, public enterprise reforms and social sector policies. The main objective of

these reforms was to re-orient the Indian economy so as to make it open to market-

driven forces.

The reforms were carried out in many segments of economic activity, though their

coverage and depth varied from sector to sector. A summary of these reforms is given 2 in Box 1. There exists significant literature to analyse the varied impact of these

reforms on the Indian economy.

gainst a backdrop of these factors, the objectives of the plans and the strategy of Adevelopment have completely changed in recent years. At present, the plans

focus on growth targets per capita income of GDP, and the development strategy is to

be indirectly planning to promote the private sector. The Tenth Five-Year Plan of the

Government of India (2002) outlines the main objective as, '…. that the tenth plan

should aim at an indicative target of 8 percent average GDP growth for the period

2002-07…' However, it adds: '… that economic growth cannot be the only objective of

national planning and, indeed, over the years development objectives are being

defined not just in terms of increase in GDP or per capita income but more broadly in

terms of enhancement of human well being…' Regarding development strategy, the

role of the government has drastically changed, as can be found in Tenth Five-Year

Plan document. For instance, '… the public sector is much less dominant than it used

to be in many critical sectors and its relative position is likely to decline further as

government ownership in many existing public sector organisations is expected to

substantially decline. It is clear that industrial growth in future will depend largely

93

fter independence, the output of the Indian economy (i.e. Gross Domestic

Product or GDP) stagnated around an average growth of 3.5 per cent per annum A

he changes in sources of growth as well as the process have resulted in significant

shifts in production structure (Table 2). The services sector (including Tconstruction) with a high growth rate has emerged as the largest sector with more

than a 50 per cent share in total real output. On the other hand, the share of

agriculture in output has been consistently declining as compared to the earlier

periods.

Savings and investmentThe increasing rate of real output of a country demands resource mobilisation. In this

context it should be noted that the rate of gross domestic savings (as a proportion of

gross domestic product) has increased from 21 per cent in the pre-reform period to

around 24.0 per cent in the later half of the post-reform era (Table 3). It is also

observed that India's savings rate has fluctuated significantly from year to year during 4both the pre and post reform era . The sources of gross domestic savings have

changed significantly in the recent past. The household sector (particularly financial

savings) has significantly increased its share in the post-reform period. The gross

domestic savings in a large number of East Asian emerging markets have increased

significantly in the last 2-3 decades (Table 3). Although India's savings also increased,

the rate of increase is significantly lower than that of East Asian countries. The

declining trend in India's savings rate can be attributed, to a large extent, to public 5savings which have shown a negative value since 1998 .

otably, the structural adjustment process has led to an increase in demand on Ninvestment. India's investment rate has comparatively increased in the post-

reform period as compared to the pre-reform period. However, it is relatively low

compared to other countries. India has to enhance her savings rate if the 8 per cent

target of the Tenth Five-Year Plan is to be achieved.

Table 2: India: Sectoral Composition of Real Gross Domestic Product

Source: Reserve Bank of India (2004).

(Per cent)

Sector 1950s 1960s 1970s 1980s 1990s 2000-

01 P 2001-

02 * 2002-

03 #

1. Agriculture and Allied

Activities 56.1 47.8 42.8 36.4 29.1 23.8 23.9 22.1

2. Industry 11.7 15.1 16.9 19.5 21.9 22.0 21.5 21.8

3. Services

32.6

37.3

40.3

44.0

49.0 54.1

54.6

56.1

4. GDP at factor cost

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

P Provisional, * Quick Estimates, # Revised Estimates

Table 1: Growth Performance in India and Select Emerging Market Economies

(Annual average growth rate in percent)

Country GDP Agriculture Industry Services

1980-

1990

1990-

2000

2001 2002 2003

1980-

1990

1990-

2000

1980-

1990

1990- 2000

1980- 1990

1990

- 2000

Argentina -0.7 4.3 -4.4 -10.9 5.5 0.7 3.4 -1.3 3.8 0.0 4.5

Brazil 2.7 2.9 1.4 1.5 1.5 2.8 3.2 2.0 2.6 3.3 3.0

China 10.1 10.3 7.5 8.0 7.5 5.9 4.1 11.1 13.7 13.5 9.0

India 5.8 6.0 5.6 4.3 7.0 3.1 3.0 6.9 6.4 7.0 8.0

Indonesia 6.1 4.2 3.4 3.7 3.5 3.6 2.1 7.3 5.2 6.5 4.0

Malaysia 5.3 7.0 0.3 4.1 4.2 3.4 0.3 6.8 8.6 4.9 7.2

Mexico 1.1 3.1 -0.2 0.7 1.5 0.8 1.8 1.1 3.8 1.4 2.9

Thailand 7.6 4.2 1.9 5.3 5.0 3.9 2.1 9.8 5.3 7.3 3.7

Computed on the basis of data from World Bank (2002), World Development Indicators 2002

Source: Reserve Bank of India (2003).

95 96

IV. Social Sector Indicators In this section we compare two indicators of social welfare in the pre and post reform

periods, namely (1) incidence of poverty and (2) level of unemployment.

Figure 1 gives the percentage of the Indian population living in poverty during 1973-

74 to 1999-2000 and a projection for 2006-07 as given in the Indian Tenth Five-Year 6Plan document . It shows that the percentage of population living in poverty fell

7sharply from 56 per cent in 1973-74 to 26 per cent in 1999-2000 . The number of poor

people declined steadily from 321 million in 1973-74, to 240 million in 1999-2000. In

India, the poverty lines are described as permitting a calorie intake of, say, 2400

calories in rural areas and 2100 calories in the urban areas.

ne can see from this figure that the rate of decline of India's poverty was higher Owhen the growth rate was high. Apart from an increase in the GDP growth, a

number of other factors have probably affected the decline in poverty rate. There is a

controversy over the declining rate of population below the poverty line being

inconsistent overtime. In fact, quite a few studies show that the number of people

below the poverty line (in percentage) increased immediately after the reforms (i.e. 81992-94) and then led to a significant decline in recent years .

It is very difficult to measure the impact of the reforms on the rate of employment (or

unemployment) in a country like India where available information is sketchy. It is

probably due to the fact that more than 90 per cent of India's employment is in the

unorganised or informal sector. Even if some data is available, it is not comparable

over time due to definition, coverage and other factors. Recently a report of a special

group of Government of India (2002c) has attempted to generate some numbers on a 9comparable basis . The report summarises: '…the unemployment rate in India has

increased significantly since 1993-94 and was above 7.3 per cent in 1999-2000

compared to 6.0 per cent in 1993-94 on Current Daily Status basis… . The present

rising unemployment is primarily an outcome of a declining job creating capacity of

growth, observed since 1993-94. The employment growth fell to 1.07 per cent per

annum (between 1993-94 and 1999-2000) from 2.7 per cent per annum in the past

(between 1983 and 1993-94) in spite of acceleration in GDP growth from 5.2 per cent

between 1983 and 1993-94 to 6.7 per cent between 1993-94 and 1999-2000. It means

that the capacity of job creation per unit of output went down about three times

compared to that in the 1980s and early 1990s.' Table 4 gives the rate of employment

and unemployment in the pre and post-reforms period for select years. The possible

factors for this declining rate of employment growth in recent years, have been

identified as follow: (i) Employment in the public sector was negative.(ii) The organised sector employment generating capacity was negligible.(iii) The pattern of growth is not favourable to labour intensive sectors.(iv) Shedding of excess labour to make different sectors competitive. (v) Definition of 'small-scale sectors' changes over time.

V. External SectorThe Indian trade policy flows from the general development strategy that is being

followed. As a result, while trade policies had been strongly biased towards import

substitution, the quantity of trade had been very small. Import control mechanisms

were first introduced as a result of the foreign exchange crisis of the Second Plan

(1956-61). In the last half of the 1950s, protection from imports was afforded to

almost all manufacturing activities. In the pre-reform period India's import and

Figure I: Poverty Rate in India, 1974-2000

54.951.3

44.538.9

36

26.119.3

0

10

20

30

40

50

60

19

73

-74

19

77

-78

19

83

19

87

-88

19

93

-94

19

99

-20

00

20

06

-

07

(Pro

jec

ted

)

Year

Po

ve

rty

Ra

te (

%)

Table 4: India: Past and Present Macro Scenario on Employment

and Unemployment (CDS Basis) (Person years)

All estimates are on CDS (Current Daily Status basis) Parentheses denote percentage Source: Government of India (2002c)

(Million) Growth per annum (%)

1983 1993-94

1999-2000

1983 to 1993-94

1993-94 to 1999-2000

All India Population

718.20

894.01

1003.97

2.00

1.95

Labour Force

261.33

335.97

363.33

2.43

1.31

Workforce

239.57

315.84

336.75

2.70

1.07

Unemployment rate (%) (8.3) (5.99) (7.32)

No. of unemployed 21.76 20.13 26.58 -0.08 4.74

98

Table 3: Savings and Investment of Select East Asian Countries and India

(Per cent of GDP)

Country Gross Domestic Saving Gross Domestic Investment

1971-80 1981-90 1991-96 1997-2003 1971-80 1981-90 1991-96 1997-2003

China 35.8 20.8 40.3 39.2 33.9 30.5 39.6 38.0

Hong Kong 28.4 33.5 32.8 32.2 27.8 27.2 30.4 27.5

India 20.5 21.2 22.2 23.5 20.5 22.4 23.6 24.0

Indonesia 21.6 30.9 30.2 24.1 19.3 29.3 31.3 17.5

Korea, Rep. of

22.3

32.4

35.2

31.5

28.6

30.6 37.0

27.1

Malaysia

29.1

33.2

37.6

44.7

24.9

30.6 38.8

27.5

Philippines

26.5

22.2

16.5

20.8

27.8

22.0 22.2

18.3

Singapore

30.0

41.8

48.1

47.7

41.2

41.7

35.1

29.3

Thailand

22.2

27.2

34.6

31.8

25.3

30.7 41.0

24.1

Source: Reserve Bank of India (2004)

97

improved significantly even after having followed a liberal policy with respect to

incentives as well as exchange rate.

The Quantitative Restrictions (QR) regime also inflicted very high costs on most

Indian exports. In comparison, India's competitors used to obtain basic inputs at

world prices and could import any input without delay. Products that required a quick

export response and complex backward linkages were heavily penalised by the trade

regime. Unfortunately, it is precisely these products that had high value added large

export markets and high unit value. Thus, India's exports tended to be simpler and

with very low unit value. Furthermore, Indian firms tend to hold much larger

inventories due to uncertainties in the availability of imported inputs and local

supplies. This raised their costs of production significantly above the competitors that

followed just-in-time inventory policies. Keeping this in mind, the new policy

packages of the post-reform period aimed to reform the tax and the QR system.

ecent statistics show that India's trade has increased significantly during the Rpost-reform period. To be precise, the share of India's export in world mercantile

trade has increased from 0.52 per cent in 1990, to 0.8 percent in 2002 (Table 5).

During the reform period India's exports have increased from US$ 18.1 billion in

1990-91 to US$ 52.8 billion in 2002-03, while India's imports have increased from

US$ 24.1 billion in 1990-91 to US$ 61.6 billion in 2002-03. The higher growth in

India's exports over imports has led to a decline of India's trade deficit (Fig. II). The

composition of India's export/import by commodities and destination markets also

changed significantly .

Source: Government of India, (2002a, 2002b).Sources: Government of India, http://commerce.nic.in/indtrde.htm; CMIE, India Trades.

VI. Concluding ObservationsThis paper provides a review of the state of India's economy in the context of the

reforms that were initiated in early 1990s. It gives an overview of recent trends in

India's economy with a particular emphasis on real macro-economic indicators, select

11

export policy was guided by the Import and Export Control Act of 1947. In 1977, two

additional orders, namely, the Import Control Order and Export Control Order, were

introduced. The subsequent annual policy of imports and exports were based on this

legislation alone. A long-term trade policy, for three years, was announced in 1985 by

the government and some concrete steps towards liberalisation were taken within the

framework of economic reforms. Presently, the two main documents namely, (a)

Export and Import Policy, and (b) Handbook of Procedures, summarise the policy,

process and procedures of export and imports for five years: April 2002 to March

2007. The import and export policy determines in great detail the import procedures

that are applicable to specific products, license, importers entitlement as well as other

details relevant for the imports of goods and commodities.

n the pre-reform period, India's trade policy regime was complex and cumbersome. IBut in the post-reform period all types of quantitative restrictions have been 10removed . A number of other indirect measures, mostly relating to money and

finances, had been adopted in the earlier years of reforms. Most of these measures

were generally introduced by the Indian Central Bank and related to administrative

procedures. These were to do with the availability of foreign exchange, advance

imports deposit, tax on foreign trade transactions and had the same effect as tariffs. In

the 1990s, convertibility on current account too has given flexibility in acquiring

foreign exchange on travel, imports and exports. A significant number of other

restrictions too have been comparatively eased or removed.

Import substitution required import intensive investment alongside increasing

government expenditure and the policy of fixed nominal exchange rates. This had two

consequences. Firstly, the government budgetary deficit worsened due to increased

government expenditure leading to inflation. Domestic inflation in the face of fixed

nominal exchange rates caused real exchange rates to appreciate and real returns to

exporters to fall. One important consequence of the overvaluation of exchange rates

was a worsening of the current account balance during the late 1980s and early 1990s.

This led to a gradual depletion of foreign exchange reserves up to a point where the

government felt the need to take action.

he high profitability of production for the domestic market relative to production Tfor exports, and the high cost of Indian products compared to their competitors,

contributed to the low level of exports. Although India has had many schemes

intended to support exports and to compensate for the effects of high production costs

and indirect taxes, these schemes had been complex and unsatisfactory in their

administrative implementation and procedures. The sum total was a marginalised

export activity in India during the pre-reform period.

India had a number of very elaborate export incentive schemes that matched the

complexity of the import and tariff systems. These arrangements involved

compensating exports for domestic and import taxes, and allowing them to import

otherwise restricted products for use as inputs. This set of export promotion efforts

has been viewed with scepticism, because export volume does not appear to have

Table 5: India's Export and World Trade, 1990-2001

(US $ Billion)

1990 1995 2000 2001 2002

Value of Indias Exports 17.969 30.630 42.101 43.3 49.25

World Trade (Exports) 3438.6 5120.2 6310.1 6120.8 6138.9

% Share of India in World Trade (Exports)

0.52 0.60

0.67

0.71

0.80

Source: Data of IFS Online, IMF (2003).

99 100

l

Opportunities per year over the Tenth Plan Period, (Chairman Dr. S.P. Gupta), Planning

Commission, New Delhi, 2002c.lGovernment of India, Economic Survey 2002-03, Ministry of Finance and Company Affairs,

Economic Division, 2003.lIMF, Direction of Trade Statistics, June, 2003.lV. Joshi and I. M. D. Little, India's Economic Reforms-1991-2001, (New Delhi: Oxford

University Press, 1996) .lAnne O. Krueger (ed.), Economic Policy Reforms and the Indian Economy, (University of

Chicago Press, 2002) p. 377.lArvind Panagariya, 'India's Economic Reforms: What Has Been Accomplished? What

Remains to Be Done?' Asian Development Bank, ERD Policy Brief Series no. 2, 2002.lReserve Bank of India, Report on Currency and Finance 2001-02, Mumbai, 2003.lReserve Bank of India, Report on Currency and Finance 2001-02, Mumbai, 2004.lRIS, South Asia Development and Cooperation Report 2004, (New Delhi: RIS, 2004).lT.N. Srinivasan and Suresh D. Tendulkar, Reintegrating India with the World Economy,

(New Delhi: Oxford University Press, 2003).l'India's Shining Hopes: A Survey of India, Special Issue on India's Prospects', The

Economist, London, 2004.lWorld Bank, India: Reducing Poverty, Accelerating Development, (Washington D.C.:

Oxford University Press for the World Bank, 2000).

Government of India, Report of the Special Group on Targeting Ten Million Employment

102

social factors and the trade scenario. At present, the Indian economy comparatively

in a better position. Although the country initially followed a cautious approach and

is

Figure II: India's Exports and Imports with World

0

10000

20000

30000

40000

50000

60000

70000

1990-

91

1991-

92

1992-

93

1993-

94

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

01

2002-

03

Year

Va

lue

(M

ill. U

S$

)

Imports Exports

101

Pakistan: Performance and Prospects A. R. Kemal

I. IntroductionDuring the last few years Pakistan has witnessed a sharp improvement in its financial

sector. From a situation of unsustainable fiscal and balance of payment deficits a few

years ago, the balance of payments has turned into a surplus and there has been a

sharp decline in the fiscal deficit. The fiscal deficit has fallen to 4 per cent of GDP,

balance of payments has a surplus equivalent to 3.9 per cent of GDP, foreign exchange

reserves have exceeded US$ 12.5 billion, exports are growing at a rate of more than 15

per cent, workers' remittances are expected to range between US$ 3.5-US$ 4.0 billion,

the interest rates have fallen to less than 7 per cent, rupee has stabilised and the

inflation rate ranges between 3 to 4 per cent. The real sector of the economy has also

shown improved performance during 2002-03: growth rates of GDP, agriculture and

the large scale manufacturing sector have been 5.1, 4.1 and 8.7 per cent, respectively.

Moreover, the GDP growth is expected to be more than a target of 5.3 per cent for the

current year and the growth rate of the manufacturing sector will be in double digits.

This indeed shows a remarkable turn around in the economy over the last couple of

years. The rising growth rates of per capita income are expected to ease the

employment and poverty situation.

he strong financial macroeconomic indicators, however, have so far failed to raise Tthe rate of investment; fixed investment in 2001-02 and 2002-03 has been just

13.1 per cent of GDP. With this level of investment, the growth rates of no more than 4

per cent can be sustained in the long run. Considering that there is no longer the debt-

hangover and due to the continuity of the policies for more than three years and

resolve of the government to honour the agreements reached by the previous

government, the perception of investors is likely to improve regarding the investment

climate in Pakistan. It needs to be underlined that the higher levels of investment are

a pre-requisite for sustained growth of per capita incomes, human development,

employment generation and better living standards.

In this paper, I will examine structural changes brought about in the fiscal, monetary

and financial sectors as well as in the real sector of the economy.

II. Fiscal and Monetary PoliciesFiscal deficit as a proportion of GDP is a crucial variable both for the stability of the

economy as well as for investors' confidence. High fiscal deficits raise the inflation rate

and may crowd out private investment. Since high fiscal deficits imply an increase in

the tax rates or a reduction in the development expenditure resulting in poor and

inadequate infrastructure, investors are reluctant to invest. Accordingly, Pakistan has

103 104

As pointed out earlier, fiscal deficit and the money supply are interrelated. The

pursuit of monetary policy is rather difficult when the financing of the fiscal deficit

absorbs a large proportion of the increase in credit. Fortunately, because of the

decline in fiscal deficit in recent years, there is little demand by the public sector for

the bank credit and that has made it easier for the State Bank of Pakistan to meet the

credit needs of the private sector at low interest rates without worrying too much

about inflationary tendencies in the economy. For example, in 1998-99 money supply

was contained, but credit to the private sector increased sharply.

owever, in the next two years, credit demand of the private sector slackened due Hto various reasons resulting in excess liquidity with banks. During the last two

years, the money supply has increased rather sharply because State Bank of Pakistan

purchased foreign exchange from the banks and open market. Despite the 4sterilisation, money supply increased at rather high rates of 15.4 and 18.0 per cent in

2001-02, and 2002-03, respectively. The increase in money supply so far has not

fuelled inflation but if the money holders decide to spend, the inflation rates would

tend to rise.

There have been important developments in the monetary sector over the last few

years. The State Bank of Pakistan has been given full autonomy and it is using market

based instruments to: control the money supply, auction the government securities

through bids, develop secondary securities market, withdraw restrictions on the

maximum and minimum rates of return on the deposits and improve the State Bank's

regulatory and surveillance capacity. However, the infected portfolio of banks is still 5large and the decline in non-performing loans would help in reducing the spread

Table 2: Tax Structure of Pakistan

(%age share of tax revenues)

Indirect Taxes

Direct Taxes

Total Tariffs Sales Excise Duties

1987-88 13.3 86.7 40.7 9.3 18.8 1998-99 27.0 73.0 20.1 17.6 16.0 1999-00 28.5 72.3 15.2 28.8 14.1 2000-01 29.1 75.8 14.7 34.8 11.4 2001-02

30.8

69.4

10.0

34.9

10.2 2002-03 27.7 72.3 12.5 35.6 8.6

Source: Based on data derived from Pakistan Economic Survey, various issues.

Table 3: Growth Rate of Money Supply(Percent)

Public Sector

Borrowing Budgetary Support

Private Sector

Money Supply (M2)

1987-88 17.3 13.3 13.4 12.21997-98 8.4 9.5 13.8 14.5 1998-99 -11.8 -13.6 17.1 6.2 1999-00 13.3 7.9 3.2 9.4 2000-01

-7.1

-6.0

8.2

9.0 2001-02

3.7

2.9

2.5

15.4 2002-03 -11.6 -8.3 16.2 18.0

Source: Pakistan Economic Survey, various issues.

106

been grappling with the handicap of fiscal deficit. When Pakistan signed the first of

many Structural Adjustment and Stabilisation Programs with the IMF, the fiscal

deficit in 1987-88 was as high as 8.5 per cent of GDP; by 1998-99 the fiscal deficit was

brought down to 6.1 per cent. While the deficit increased to 6.6 percent in 1999-2000,

it had gradually declined to 4.5 per cent by 2002-03 and the target for the current

year is 4.0 percent of GDP. A number of factors have been responsible for the decline

in the fiscal deficit, including the debt reprofiling, slow growth of public debt, decline

in the interest rates, reduction in the development expenditure and an increase in 1non-tax revenues . We may also note that in the process of reduction in the fiscal

deficit, development expenditure has fallen to such a low level that it is not even 2sufficient for the provision of physical and social infrastructure .

he long run viable solution for a reduction in the fiscal deficit is to make the tax Tstructure elastic and progressive. Whereas over the 1990s, the direct tax structure

was marred by withholding taxes that made most of such taxes essentially indirect,

the replacement of such taxes with the proper income taxes would hopefully help in

improving the elasticity of the tax structure and making it progressive. Major

structural changes have been made in indirect taxes, the share of domestic taxes has

increased and import duties are being levied only for protection purposes; tariff rates

have been rationalised and the maximum import duty has been reduced to 25 per 3cent . The share of customs duties in the total tax revenue declined from 40.7 per cent

in 1987-88 to 21.0 in 1998-99 and further to 10.4 per cent in 2001-02. Similarly, the

share of excise duties has declined from 18.8 per cent in 1987-88 to 8.6 per cent by

2002-03. The share of sales taxes, however, increased from just 9.3 per cent in 1987-

88 to 35.6 per cent by 2002-03. In the future, the sales and income taxes will be the

two main sources of tax revenue; while tariffs will be levied for protection purposes

and excise taxes on products with an attempt to reduce consumption of certain

products.

Table 1: Budgetary Deficit in Pakistan (as percentage of GDP)


Public Expenditures Total Revenues

Tax Revenues

Total Non-Development

Interest Payment

Development

Budgetary Deficits

Primary Surplus

1987-88 17.3 13.8 26.7 19.8 6.9 6.9 8.5 -1.6

1998-99 15.9 13.2 22.0 18.6 7.5 3.4 6.1 1.4

1999-00 16.3 12.9 22.5 19.9 8.3 2.6 6.6 1.7

2000-01 16.2 12.9 21.0 18.9 7.3 2.1 5.2 2.1

2001-02 17.2 13.2 22.8 19.3 7.1 3.5 5.2 2.5

2002-03 17.9 13.8 22.4 19.7 5.9 2.7 4.3 1.6

105

between deposits and lending rates and a further reduction in the interest rate which

at present is around 7 per cent. Prudent monetary policy has helped in bringing

Table 4: Inflation Rate

Period

Consumer

Price Index Wholesale

Price Index GDP

Deflator1987-88

6.3

10.0

9.6

1996-97 11.8 13.0 13.3

1997-98 7.8 6.6 7.7 1998-99 5.7 6.3 5.9 1999-00 3.6 1.8 2.8 2000-01

4.4

6.2

6.0

2001-02

3.5

2.1

3.2 2002-03 3.1 5.9 4.5


Table 5: Degree of Openness in Pakistan's Economy

(% of GDP)

1987-88

1992-93

1997-98 2001-02

2002-03

Exports 11.6 13.2 13.6 15.5 15.8

Imports 16.7 19.6 16.6 16.0 16.6 Degree of openness

28.3 32.8 30.2 31.5 32.4


Whenever public debt, especially foreign debt, assumes significant proportions,

resource inflows dry out and sometimes there is transfer of resources from the debtor

counties. Investment tends to fall as the debt rises beyond safe limits, investible

resources fall due to sharp increases in debt servicing, investors loose confidence,

demand falls to low levels, interest rates start rising and there is massive capital flight.

Since the debt servicing assumed alarming proportions in the mid nineties, it is no

wonder that the debt problem has been haunting the policy makers.

ublic debt increased from Rs. 538 billion in 1987-88 to Rs. 3077 billion in 1998-P99 and further to Rs. 3783 billion by 2000-01, i.e., 79.8, 104.7 and 113.5 per cent

of GDP, respectively. Internal debt increased from Rs. 290.1 billion in 1987-88 to Rs.

1392.5 billion in 1998-99 and further to Rs. 1731 billion by 2000-01. Similarly,

external obligations increased from Rs. 247.9 billion in 1987/88, to Rs. 1614.4 billion

in 1998-99, and to Rs. 2059.5 billion in 2000-01. However, the total debt has

stabilised and, as a percentage of GDP, has declined to 95.1 per cent in the last couple

of years. A number of factors have been responsible for this turnaround. Firstly, there

have been smaller budget deficits and at least a part of them have been financed

through grants rather than loans. Secondly, some of the debt has been written off,

while some has been converted into debt-social sector spending swaps. Third, there

has been a reduction in the interest rate and the borrowing for repayment has been

less costly. Fourthly, the appreciation of the rupee against the dollar has also meant a

reduction in foreign debt denominated in the local currency.

a) Explicit Liabilities include Special US$ Bonds, FEBCs, FCBCs and DBCs; of which Special US$

Bond is a foreign liability, while FEBCs, FCBCs and DBCs are also foreign liabilities payable in Rupees.b) Repayment of principal includes repayment of foreign debt and short-term credit.Source: State Bank of Pakistan, Annual Report, 2002-03.

The debt servicing as a percentage of exports, foreign exchange earnings, or public

Table 6: Trends in Balance of Payments (Million $)

Years Exports Imports Trade Balance

Remittances Current Account

1987-88 4362 6919 -2557 2013 -1682 1995-96 8311 12015 -3704 1461 -4575 1998-99 7528 9613 -2085 1060 -2429 1999-00 8190 9602 -1412 983 -1143 2000-01 8933 10202 -1269 1087 -513 2001-02 9140 9434 -294 2389 +1338 2002-03 10889 11425 -536 4237 +3028


107 108

AgricultureThe main sources of growth in agriculture have been greater water availability,

balanced use of inputs and better seed, especially of cotton. However, the drought has

brought home the point that unless reservoirs are created, the sustained high growth

rate of agriculture would not be possible. A shift in the policy focus towards the

development of bio-technology, agricultural research and reorganisation of

agricultural extension service for diffusion of technology in the shortest possible time,

is absolutely essential for future growth of the agriculture sector. Institutional

approaches for uplift of small farmers will also be of crucial significance for

improvement in productivity. Besides, policy initiatives are absolutely necessary for

the non-crop sector of agriculture which has suffered in the past due to neglect of the

government.

ManufacturingThe stagnation in the growth rate of manufacturing output until 2002-03 has been

due to a number of factors which include: falling levels of investment, reduced

effective protection after tariff rationalisation resulting in closure of a large number of

industrial units, the increase in the price of electricity which made Pakistani

manufactured products uncompetitive in the world market and in the domestic

market, smuggling, deteriorating law and order situation, severe shortages of

infrastructure facilities, changing taxation regimes, slackness of demand as a result of

deflationary policies and structural weaknesses of the sector. Increase in sales taxes

on domestic production coupled with high import duty on imports of raw materials

and intermediate goods led to erosion of their competitive edge, especially against the

smuggled goods. Pakistan's industrial sector is as concentrated as it was about 40

years back; food and textiles still account for almost 40 per cent of the output. The

future growth of the sector is dependant on higher investment flows especially in the

non-traditional sectors in which the country has comparative advantage. The

investment in manufacturing industries have gone down from 4.7 per cent of GDP in

1992-93 to just 3.3 per cent of GDP in 2002-03.

III. Investment Policies and Trends

Table 8: Compound Growth Rates at Constant Factor Cost

1980s

1987-88 to 1992-93

1992-93 to 1998-99

1998-99 to

2001-02 2002-03

GDP 6.5 4.8 4.2 3.6 5.1 Agriculture 5.4 3.7 4.9 1.0 4.1

Manufacturing 8.2 4.4 3.6 4.9 7.7 Per Capita Income 3.7 1.5 0.7 1.5 6.6


110

revenues has declined significantly. This has been rather helpful in the reduction of

the fiscal deficit and the creation of a fiscal space that can be used to increase

development expenditure. As is well known, if the public investment is in the physical

and social infrastructures, it crowds in private investment.

V. Growth, Savings, Investment and ProductivityThe growth of GDP depends on production factors such as labour and capital, and the

levels of productivity. We may note that the productivity of labour depends on the

human resources incorporated in labour. Similarly, accumulation of capital through

new investments also results in embodied technology resulting in an increase in

productivity levels. In this section, we examine the growth rates of output, savings and

investment, human resource development and the growth of productivity.

rowth of GDP decelerated in the 1990s. Whereas in the 1980s GDP grew at a rate Gof 6.5 per cent, the growth rates decelerated to 3.2 per cent over the 1999-2002

period. Similarly, the growth rates of agriculture and manufacturing decelerated from

5.4 and 9.2 per cent in the 1980s to 1.0 and 4.9 per cent, respectively, during the

1999-2002 period. However, the growth rate of GDP increased to 5.1 per cent in

2002-03, and those of agriculture and manufacturing to 4.1 and 7.7 per cent. The

large scale manufacturing sector registered a growth rate of 8.7 per cent. Both because

of the increase in GDP and the sharp increase in worker' remittances, the per capita

income has grown at a rate of 6.6 per cent. For the year 2003-04 the growth rate of

GDP is expected to range between 5.5 and 6.0 per cent with manufacturing growth in

the double digit.

The factors that have been responsible for the increase in growth rate of GDP in 2002-

03 and 2003-04, despite the declining level of investment rates, need to be examined

with a view to ascertain the sustainability of the trend. A number of factors, mostly on

the demand side, have been responsible for growth. Firstly, better availability of water

has resulted in good crops and that has generated higher demand for the

manufacturing output. Secondly, the increase in exports by more than 22 per cent,

generated by the demand for textiles and other exportable products, led to better

utilisation of the existing capacity. Thirdly, consumer financing resulted in an upsurge

in the demand for automobiles whose production increased by more than 50 per cent.

Fourthly, increase in the development expenditures and exports to Afghanistan of

construction material, especially cement, also helped manufacturing output. We may

note, however, that the stimulation of demand can generate higher levels of output in

the short-run, but for the sustained high growth of GDP the rate of investment must

accelerate.

Table 7: Profile of Domestic and External Debt (Billion Rs.)

FY 99 FY 00 FY01 FY02 FY03

Total Debt 3,077.0 3,336.8 3,884.5 3,783.0 3,821.6 1. Domestic Debt 1,392.5 1,578.8 1,731.0 1,717.9 1,852.4 2. External Debt 1,614.4 1,682.7 2,059.5 2,005.6 1,927.7

3. Explicit liabilitiesa 70.1 75.4 94.0 59.5 41.6

As Percent of GDP Total Debt 104.7 106.0 113.5 104.3 95.1 Domestic Debt 47.4 50.2 50.6 47.3 46.1 External Debt

54.9

53.5

60.2

55.3

48.0

Explicit Liabilities

2.4

2.4

2.7

1.6

1.0

Total Public Debt Servicing

343.1

366.3

340.3

431.2

304.7

Total Public Interest Payments

220.1

269.2

254.4

266.3

241.3

i.

Domestic

178.9

218.7

195.4

199.6

198.0

ii.

Foreign

38.0

44.9

51.2

61.1

39.8

iii.

Explicit liabilities

3.2

5.6

7.8

5.6

3.5

Repayment of Principalb

123.0

97.1

85.9

164.9

63.4

Ratio of External Debt Servicing to

Export Earnings

35.3

36.5

38.0

44.8

28.8

Foreign Exchange Earnings

23.6

23.4

23.7

26.5

16.0

Ratio of Total Public Debt Servicing to Tax revenue 87.8 90.3 77.1 90.2 54.8 Total revenue 73.2 71.5 61.5 69.1 42.3 Total expenditure 53.0 51.7 47.4 52.2 33.9 Current expenditure 62.7 58.5 52.7 61.6 39.0

109

During the 1990s, the government provided various incentive schemes which were

later withdrawn. However, the 1997 investment policy, which continues to be the

enterprises, telecommunication, public utilities, etc. However, with the privatisation

of public monopolies, regulation has become essential and the government has come

out with credible regulatory frameworks for power, telecommunications, gas and

petroleum sectors.

VII. Growth of Productivity LevelsThe growth of output is the result of the higher application of inputs, and

improvements in the levels of productivity. It needs to be noted that the main

contribution towards growth in the developed world has been improvements in the

productivity rather than the use of inputs. Whereas productivity increased at a rapid

rate in the 1960s and 1980s when it grew at a rate of more than 3 per cent, the total

factor productivity (TFP) decelerated in the 1990s to just 0.78 per cent. However,

because of market-oriented reforms in the agricultural sector, TFP growth in the

agricultural sector recovered to 1.52 per cent, and in the manufacturing sector it was

1.64 per cent.

Total factor productivity has contributed 1.7 to 2.0 per cent to the overall growth rate

of the economy since the 1960s. The relative contribution of TFP in growth process

ranges between 31 to 39 per cent. That these estimates are higher in comparison with

the other developing economies is evident from the following table.

Whereas the growth in total factor productivity in Pakistan has been relatively higher,

it needs to be noted that rising levels of TFP in manufacturing reflect extreme forms of

inefficiency in the base year and growth is essentially catching up; learning by doing

coefficients have been rather large. The high growth rates of productivity cannot be

maintained unless there is a sharp increase in investment which brings new

Table 9: Growth Rates in Agriculture Sector

Period

Agriculture

Major Crops

Minor Crops

Livestock

Fisheries

Forestry

1987/88-1992/93 3.7 1.9 4.7 5.8 5.3 -1.51992/93-1997-98 5.6 3.8 6.6 7.9 2.1 -7.41997/98-2000-01 1.7 1.1 1.4 3.3 2.5 24.0

2001-02 -0.1 -1.8 -1.8 3.7 -12.0 -1.32002-03 4.1 5.8 0.4 2.9 16.6 8.8


Table 10: Growth Rates of Manufacturing

Period Small Scale Large Scale Total

1987-88 8.4 10.6 10.0

1997-98 5.3 7.6 6.9 1998-99 5.3 3.6 4.1 1999-00 5.3 -0.01 1.5 2000-01 5.3 9.5 8.2 2001-02 5.3 4.9 5.0 2002-03 5.3 8.7 7.7


Table 11: Trends in Investments(%age of GDP)

Years

Total Investment

Fixed Investment

Public Investment

Private Investment

Share of private sector in fixed factor

1987-88

17.3

15.8

8.5

7.4

46.5

1992-93 20.6 19.0 9.0 10.0 52.5

1998-99 15.6 13.9 6.1 7.9 56.8

1999-00 16 14.4 6.0 8.4 58.3 2000-01

15.9

14.2

6.3

8.0

55.9 2001-02

14.7

13.1

4.7

8.4

64.1

2002-03 15.5 13.1 4.5 8.6 65.6


111 112

Because of the rising rate of unemployment, nominal wages have remained constant

since 1998 for unskilled and construction workers. The real wage rates have fallen,

resulting in deterioration in functional income distribution. Since the workers are

generally poor while the rich own the capital stock, the distribution of income across

various sections of population has also gone down.

Trends in poverty levelsPoverty has increased sharply during the 1990s, though it has been exaggerated. It

needs to be noted that the estimates of poverty presented in Amjad and Kemal (1997)

for the year 1992-93 are significantly lower than that of FBS or the World Bank and,

as such, one cannot argue that poverty has increased from 17.6 per cent in 1987-88 to

32.6 per cent in 1998-99. For comparison the poverty line must be the same.

Nevertheless, the poverty levels over 1993-99 have gone up from 26.6 to 32.2 per cent.

Since growth rates fell further and unemployment rates increased, poverty levels have

increased further during the 1998-2001 period. The incidence of poverty was higher in

rural areas than in urban areas and has increased in both areas. The two main factors

that determine the poverty level are rate of unemployment and per capita incomes

[see Amjad and Kemal (1997) and Kemal (2003)].

Contrary to general belief, poverty is not a transitory phenomenon; only 31 per cent of

the poor households in 1998-99 were able to move out of poverty. Two-thirds of the

poor households remained in the state of poverty even after two years. Limited job

opportunities with low wages have added to the miseries of the poor households. The

transition from unemployment to employment reduces the incidence of poverty while

the movement in opposite direction, employment to unemployment, increases the

poverty level.

Table 14: Trends in Total Factor Productivity during 1990s (Percent)

Growth Rates

Sector

GDP Capital Labour

ResidualOverall 4.41 2.38 1.25 0.78Agriculture 4.54 2.21 0.81 1.52Manufacturing 3.99 2.09 0.25 1.64Contribution to: Overall Aggregate Growth 53.97 28.25 17.78Agriculture Growth 48.63 17.83 33.55Manufacturing Growth

52.54

6.26

41.20

Source: Kemal, Muslehuddin and Qadir (2002).

Economy

Period

TFP

Pakistan

1964-2001

1.70

Bangladesh

60s-1985 0.33

Sri Lanka 60s-1985 1.25

Indonesia 1960-94 0.80 Malaysia 1960-94 0.90 Philippines 1960-94 -0.40 Thailand 1960-94 1.80 Republic of Korea 1960-94 1.50 Singapore

1960-94

1.50

Taipei, China

1960-94

2.00

Source: Kemal, Muslehuddin and Qadir (2002), Basudeb & Bari (2000) and Collin & Bosworth (1997)

Table 15: International TFP Comparisons

114

technologies and more emphasis on human resource development and Research and

Development (R&D).

Productivity may increase either through improved resource allocation or by

increasing the efficiency of the resources employed in various activities. Efficient

resource allocation requires removal of distortions in the system so that the resources

flow to those activities in which the country has a comparative advantage. The

efficiency of resource use depends on a number of factors. Firstly, the latest

technologies are embodied in the new machines and as such, higher investment levels

imply a rapid increase in the technological change; second, investment in human

resource development activities including, education, training, health, nutrition,

administration, discipline, etc.- all these activities tend to improve the efficiency of

labour- third, improvements in infrastructure result in lower production costs; fourth,

learning by doing helps in a sharp increase in productivity. In this section we examine

investment levels, human resource development, and infrastructure, while the

estimates of learning by doing are available only for the manufacturing sector and for

the 1960s only.

The quality of human resources is the major determinant of productivity growth.

Unfortunately, Pakistan has lagged behind in social sector development. The literacy

levels, enrolments at various stages, basic health facilities, nutrition and other social

services in Pakistan are far from adequate. Similarly, training facilities are not only

inadequate they are not in line with demand. The future growth of productivity

depends on investments in human resources and its proper utilisation.

Even though the infrastructure has improved over time it still is far from satisfactory.

Not only is it inadequate, it is also costly. For example, the price of energy for the

industrial sector is one of the highest in the world and there is significant room for

improvement in port facilities. Considering that the power prices paid to the IPPs

would fall after 2007, the proportion of the oil fired thermal power station would be

replaced with gas fired thermal station and rationalisation of power tariff, the

possibilities of reduction in electricity tariff for the industrialists is quite bright.

Similarly, the improvements in the facilities at Karachi and Qasim ports and the

construction of Gawadar port would improve infrastructure.

VIII. Employment Generation and Poverty LevelsUnemployment rates have increased sharply over the last few years. The

unemployment rate has increased from 5.9 per cent in 1997-98 to 8.3 per cent in

2001-02. We note that more than half of the total current stock of the unemployed

consisted of the short-term unemployed, while more than a quarter was in the

category of the transitory unemployed, while 15 percent were the chronic

unemployed.

Table 12: Trends in Savings (As %age of GDP)

Year National Savings Domestic Savings 1987-88 13.6 10.6 1998-99 11.7 12.9 1999-00 14.1 15.8 2000-01 15.0 16.9 2001-02 17.0 16.9 2002-03 19.4 16.2

Source: Annual Report of the State Bank of Pakistan, various issues.

Table 13: Foreign Private Investment

Years

Direct

Portfolio

Total1987-88

--

--

177.01994-95

442.4

1089.9

1532.3

1997-98 601.3 221.3 822.61998-99 376.0 27.3 403.3

1999-2000 469.9 73.5 543.42000-2001

322.4

-140.4

182.0

2001-02

484.7

-10.1

474.6

2002-03 798.0 22.0 820.1


113

he sharp increase in per capita incomes holds promise for a reduction in poverty.

However, future growth of per capita incomes depends on the rising levels of T Table 16: Unemployment Rates in Pakistan Year Both Sexes Male Female1997-98 5.90 4.00 15.001999-2000 7.80 6.10 17.302001-02 8.30 6.70 16.50

Source: Labour Force Survey, various issues.

Table 17: Trends in Real Wage Rate of Construction

Unskilled Workers

Carpenter1998 116.5 185.3 1999 121.1 236.1 2000 114.5 226.3 2001 112.8 224.0 2002 112.3 217.9

Source: Based on Pakistan Economic Survey, 2002-03.

Table 18: Poverty Trends in Pakistan Head Count (Percentage)

TotalYear

FBS

World Bank

Planning

Commission

1992-93

26.6

26.7

-

1993-94 29.3 28.6 -

1996-97 26.3 24.0 - 1998-99 32.2 32.6 30.6 2000-01 - - 32.1

Rural 1992-93 29.9 -- -- 1993-94

34.7

33.4

--

1996-97

30.7

--

--

1998-99

36.3

35.9

34.7 2000-01 -- -- 39.0

115 116

118

Urban 1992-93 20.7 -- -- 1993-94 16.3 17.2 -- 1996-97 16.1 -- -- 1998-99 22.4 24.2 20.9 2000-01 -- -- 39.0

Source: Kemal (2003), Government of Pakistan (2003)

117

Bangladesh: An Alternative ParadigmDr Qazi Kholiquzzaman Ahmad

PurposeThis paper reviews Bangladesh's socio-economic achievements and failures, examines

the policy framework and suggests a way forward. Data used in the text is, unless

otherwise specified, taken or computed from Statistical Tables 1-6. The rest of the

paper is organised as follows: overview of development outcomes (achievements, past

failures and future challenges), the prevalent policy framework, outlining an

alternative approach, statistical tables, notes and references.

Development OutcomesAchievementsThere are several aspects in which Bangladesh has made impressive progress.

significant reduction has been achieved in the population growth rate. According Ato the Population Census 2001, the rate was down to 1.54 per cent from 2.15 per

cent as revealed by the Population Census 1991. The reasons behind this achievement

include educational progress, increased awareness and effective family planning

programmes. The infant mortality rate per thousand live births was down to 57 in

2000 compared to 92 in 1991. Similarly, under-five child mortality rate per thousand

live births declined from 151 in 1991 to 110 in 2000. The maternal mortality rate per

thousand births fell to 3.2 per cent in 2000 from 4.7 per cent in 1991. The gross

primary enrolment rate increased to 97 per cent in 2000 and further since then,

compared to 77 per cent in 1990. Also, there has been a significant increase in the

primary completion rate from 40.7 per cent in 1991 to 67 per cent in 2000. The female

primary enrolment rate has recorded a faster growth compared to the overall

enrolment rate, having risen to 97 per cent in 2000 from 66 per cent in 1991. There

has also been a notable progress in the female literacy rate, rising to 40.1 per cent in

2000 from 25.5 per cent in 1990.

Agriculture (crops, livestock and forest) grew at an impressive average annual rate of

4.6 per cent during 1996-2001. Although down to zero or negative in 2001-02, it

recovered to an estimated 3.6 per cent in 2002-03. Food grain production (rice and

wheat) reached an estimated 28 million metric tons (MTs) on gross basis and 25.3

million MTs on net basis (i.e. after deduction of 10 per cent for seeds, animal feed and

losses) in 2002-03. According to the Food Planning and Monitoring Unit of the

Ministry of Food, the food grain requirement for 2002-03 was 22.4 million MTs.

(MoF, 2003, pp. 54, 56-57). There was, thus, a significant food grain surplus in that

year. Bangladesh has, according to official statistics, been food grain self-sufficient or

nearly so, on a national basis, for the past several years- a major achievement

compared to large deficits since liberation until well into the 1990s. However, food

grain imports of certain quantities has continued- both commercial and in the form of

food aid. Food aid is used for such purposes as food-for-work, particularly for

infrastructure development, and food-for-education. The commercial import part is

difficult to understand, since there have been surpluses out of domestic production in 1recent years . But be that as it may, food insecurity continues to stare in the face of a

large proportion of the population due to lack of access to land and related facilities

for self production (at all or adequately) or lack of purchasing power to buy adequate

food. The increased food grain production has been possible mainly as a result of

increase in crop intensity, facilitated by expanded irrigation. Increased fertiliser use

has also been a contributing factor. Agricultural credit has been an enabling support

for many farmers. Above all, it is the ingenuity and hard work of the farmers that kept

the agricultural sector moving forward.

angladesh has also made notable progress in disaster management, in particular Bin cyclone and flood management. Cyclone warning and cyclone shelter facilities

established in Bangladesh have not only been saving lives and reducing losses in the

country, but have also served as examples for other countries to learn from. In the

case of flood management, combined responses by the people themselves, the

government and voluntary organisations now come into play effectively in response to

the onset of a major flood, to provide relief in terms of evacuation and supply of

essential foods, other goods, necessary services and medicine during flood. The

improvements in cyclone and flood management are indeed praiseworthy

achievements in a country which is disaster-prone. Both cyclones and floods visit the

country in a moderate way regularly and in a big way from time to time. There has

been a significant increase in the country's technical capacity of generating flood

forecasting. Improved cooperation with India and Nepal is required for data on run-

off and rainfall from more places than are available now and well in advance for

further improving the quality of forecast and increasing the lead time. Also, the

dissemination mechanisms and outreach need to be improved for timely and effective

warning to be provided to people regarding an impending flood. (Ahmad and Ahmed,

2003). Since the early 1990s, macroeconomic stability has been more or less

maintained.

verall budget deficit has been fluctuating between 4 and 5 per cent of GDP since Othe early 1990s, except for 1993-94 and 1999-00, when it was 5.8 per cent and

6.1 per cent, respectively. Current account balance has been in deficit, fluctuating

between 0.5 or so to 2.0 per cent of the GDP from the early 1990s until 2000-01,

having been balanced in 1999-00. Over the past two years, it has, in fact, been

positive, the magnitude being small though- 0.4 and 0.5 per cent in 2001-02 and

2002-03, respectively. These positive current account balances are largely due to very

significant increases in remittances received from Bangladeshis working abroad. In

fact, the trade balance has been in the negative, varying from around 5 to 7 per cent

119 120

interest in the private sector of Bangladesh.

he response of foreign direct investment (FDI) has been lukewarm to the various Tincentives provided, which include opening up of almost all sectors to FDI

without having to go into partnership with Bangladeshi investors, generous profit

repatriation and all the other facilities including tax holiday as provided to domestic

industries. Reliable data on FDI are not easy to come by. There is a grey area in

relation to registered and actualised FDI. In fact, only a small proportion of the

registered FDI seems to materialise in terms of actual investment. Available data

suggest that from negligible amounts in the early 1990s, the actualised FDI, largely in

gas exploration, reached an annual amount of US$ 280 million in 2000 and US$ 328 2million in 2002 (UNCTAD 2003, pp. 42, 251) . The reasons include corruption,

bureaucratic hassles and hindrances, political uncertainties, law and order problems,

extortionism, underdeveloped infrastructure, underdeveloped capital market and

continued failure of economic growth to accelerate.

The government's total revenue collection has been less than 10 per cent of GDP until

2000-01, having marginally topped 10 per cent in 2001-02 (10.2 per cent) and 2002-

03 (10.3 per cent, provisional). This is surely a poor performance. The reasons include

ineffectiveness and corruption on the part of the revenue collection machinery and tax

evasion by many tax payers, false statements and collusion with revenue collection

officials.

Other reasons for failure of the acceleration of economic growth include leakages of

resources through corruption, wastage of resources due to inefficient and

uncommitted public sector management, illegal transfer of resources aboard (via

over-invoicing, under-invoicing, hundies), failure to mobilise local people's energies

and local resources effectively, and under-utilisation of capacity and low productivity

in many sectors. Shortages of skilled managerial and other personnel and workers and

a non-participatory social environment are important constraining factors behind low

productivity and poor mobilisation and utilisation of human resources and various

other resources.

overty reduction, computed on the basis of basic needs approach, has registered a Pslow improvement since 1991-92 of about one percentage point a year. As a

result, as of 2000, on basic needs considerations, 50 per cent of the population was

poor and about a third extremely poor. Assuming that poverty reduction has

continued at one percentage point a year since 2000, 47 per cent of the total

population now lives below the poverty line and about 30 per cent is afflicted by

extreme poverty. However, in proportional terms, there has been a significant

improvement compared to the 1970s and 1980s, when below poverty line population

accounted for three quarters or more of the total population. But in terms of the

number of people, there has been little improvement as about 64 million people are

currently poverty stricken, a number which is not very much less than the total 3population at the time of liberation.

122

since the early 1990s.

he remittances reached US$ 3.062 billion in 2002-03, the largest source of Tforeign exchange receipts for the country and accounting for about 6 per cent of

the GDP in that year. Compared to this, the net export earnings from readymade

garments, which account for about two-thirds of the total national export earnings,

were between US$ 2.29 million and US$ 2.52 million in 2002-03 (between 50 per

cent and 55 per cent of the gross earnings, as import of clothes and other materials

account for 45 to 50 per cent) (Ahmad 2004).

The inflation rate has been under reasonable control since the early 1990s and was

just over 5 per cent in 2002-03, having been about half of this on average, during the

previous three years. In a developing country, an inflation rate of 5 per cent or so is

not at all unhealthy. Foreign exchange reserve as of May 2003 was US$ 1.8 billion

(MoF 2003, p. 207), accounting for about 2.6 months' imports, which is not too bad,

although somewhat larger foreign exchange reserve accounting for about three

months' imports is perhaps more desirable.

Failures and ChallengesThe average annual economic growth rate during the period since 1996 is somewhat

larger compared to that during the period from liberation in 1971 until the mid-1990s.

But it is still an uninspiring 5 per cent or slightly more. It is the healthy agricultural

growth rate that has been the major contributing factor to the average annual

economic growth rate of 5 per cent or so achieved since the mid-1990s. Growth in

other sectors, including manufacturing, has been sluggish.

A key reason behind the failure of the acceleration of the overall economic growth is

the stagnation in investment. The investment ratio has been virtually stagnant-

around 23 per cent of GDP- over the past several years. Private sector investment has

slightly increased during these years, but that has been matched by a slightly declining

public sector investment. The reasons for stagnating investment include the following:

omestic savings ratio has been virtually stagnant at around 18 per cent of GDP Dsince 1997, although national savings ratio has shown a slightly increasing trend

due to increasing remittances from abroad. Thus, the domestic savings ratio was

higher by 0.8 percentage point and the national savings ratio by 1.9 percentage points

in 2002-03 compared to 1997-98. As a proportion of GDP, contribution of the official

development assistance (ODA) to domestic investment has been of just 2.0 per cent of

GDP in recent years.

The export regime remains extremely narrow. Only five groups of items- readymade

garments including knitwear and hosiery (RMGs), frozen fish and shrimp, jute and

jute goods, leather and tea- amount for about 80 per cent of the total annual export

earnings of the country. As noted earlier, RMGs alone amount for about two-thirds of

the total. Export expansion, therefore, has remained limited, thereby limiting foreign

exchange availability. (MoF 2003, p.51). In fact, trade focused in a major way on

import rather than productive investment and export remains the predominant

121

The basic needs-based poverty calculation takes into account food requirements to

provide 2122 Kcal per person/day and an amount of money to cover such other basic

needs as clothing, shelter, basic education and basic healthcare. The measurement of

extreme poverty is based on a lower amount of money allowed for basic needs other

than food compared to that allowed for the overall poverty group, while food

requirement used is the same for both the groups. But, if human dignity is used as the

basis of the poverty line, which requires that people must have access not only to the

minimum basic needs as enumerated above, but also to amenities of living such as

good sanitary and environmental conditions, and equitable access to social, political,

market and cultural opportunities, then a much larger proportion of the population

(about 47 per cent) is poor.

here has been some improvement but stunting (height-for-weight), wasting T(weight-for-height), and underweight (weight-for-age) among children of 6-71

months are still high. Thus, 41 per cent, 12 per cent, and 51 per cent of the children of

this age group are below two standard deviations of the norms respectively, having

declined since 1985-86 from 61 per cent, 15 per cent, 72 per cent, respectively.

Land ownership pattern is highly skewed. Landownership distribution is available for

1996, which may have worsened since then. About 55 per cent of the rural households

own less than half an acre of land each, with 6.4 per cent owning no land at all. Small

holders owning 0.5 to 2.5 acres per household account for another 31 per cent, while

14 per cent are medium to large land-holders. Since land is the main source of food

and income in rural Bangladesh, 86 per cent of the rural households are in a bad 4shape, with about half of them in precarious condition . Employment opportunities

remain limited, particularly outside agriculture so that the poorer segments of the

rural population do not have access to adequate purchasing power to ensure their

minimum household food security, let alone seeking an improvement in their living

conditions. Many of the desperately rural poor move to urban areas, often to Dhaka

and other large cities, looking for opportunities for improving their living conditions,

but often end up in slums. ·Poverty is concentrated among the landless and land-poor. Other groups include

small artisans, fishermen, urban slum dwellers working as rickshaw pullers or in

different casual and low paid jobs, and people living in coastal areas. Also, socio-

economic disparity is glaring and increasing. The income share of the bottom 10 per

cent of the population declined from 6.5 per cent in 1991-92 to 6.2 per cent in 2000,

while that of the top 20 per cent increased from 44.8 per cent in 1991-92 to 52.0 per

cent in 2000.

isparity permeates not only the economic arena but also social and political Darenas. Thus, the poverty-stricken people are truly excluded and, hence,

deprived of opportunities for enhancing their capabilities through education, training,

and healthcare and improving their living conditions through self-employment, wage-

employment, ownership of assets and socio-political-cultural participation.

Prevailing Policy

Bangladesh joined other countries around the world in 1987 in implementing

economic reform programmes as enjoined by the Washington Consensus (WC). The

WC was developed by the World Bank and the IMF with support from USA and other

developed countries in the 1970s to promote neo-liberal free market dispensation

through privatisation, deregulation, and globalisation. To that end, stabilisation and

structural adjustment programmes were designed, which were required to be

implemented by all developing foreign-aid seeking countries. Economic growth was

once again targeted as the quintessential developmental goal, with poverty reduction

and improved income distribution relegated to the background.

The initial economic reforms package was later expanded to include other aspects of

society in response to unpalatable experiences generated in many reforming

countries, such as non-acceleration of growth, lack of progress in the private sector,

domestic market-oriented existing local industrial production suffering in the face of

competition from imports, export expansion facing strong disadvantageous reality,

widening disparity, social costs in terms of unemployment and the increase in the

number of poor people, notably in reforming African countries but elsewhere. Thus,

emphasis on social sectors (education, training, health, gender issues, family

planning) and institutional, administrative, and legal reforms consistent with a

liberalised economy and the establishment of 'safety nets' for the vulnerable people

was placed in the reform package. Also, emphasis was shifted to the effectiveness of

governance from the earlier unqualified rolling back of the government. Another

important element introduced has been environmental protection and enhancement.

Poverty reduction, however, remained to be achieved as a consequence of growth and

was not considered a direct goal of the paradigm until 1999.

owever, in view of mounting criticisms of the paradigm for the failure to reduce Hpoverty substantially, increasing disparity among countries and within

countries and persisting limited opportunities for poor people and poor countries to

make progress, poverty reduction was included as a direct goal in 1999. In that year,

all developing foreign-aid seeking countries were asked by the World Bank and the

IMF to prepare their Poverty Reduction Strategy Papers (PRSPs) once again as an aid-

conditionality. However, the broad policy framework of privatising not only

production and distribution activities but also utilities and services of all types,

including electricity, water, telecommunications, railways, education and health,

remained the cornerstone of the paradigm. Bangladesh has prepared its Interim

Poverty Reduction Strategy Paper (I-PRSP) and is now working on the final version

within the same policy framework.

Embarking in 1987 on the WC reform programme, Bangladesh has been pursuing the

path enthusiastically since the early 1990s, subscribing to the whole package of

reforms as it evolved over the years. As noted earlier, the country successfully

achieved and, more or less, maintained macroeconomic stability since the early 1990s.

But that success could not be translated into faster economic growth, much less into

accelerated poverty reduction. Moreover, the glaring socio-economic disparity has

been accentuated further and environmental degradation has continued unabated.

123 124

to be based on the prevailing ground realities. The key ground realities to be

addressed include widespread poverty; glaring and increasing socio-economic

disparity; social, political, economic exclusion; pervasive corruption and

criminalisation of politics and economics; centralised and poor governance; virtually

non-existent local government; high rate of illiteracy and low quality of education

among people at large; low human capability (in terms of education, training, health

and access to resources and various facilities); rampant unemployment and

underemployment; low productivity; absence of effective support for small and

medium enterprises, which can spread throughout the country involving people of

small means; unabated degradation of the environment; and soil quality degradation

in the agriculture sector. These realities are either in contradiction to the letter or

spirit or both of the ruling neo-paradigm or are so much subordinate to the

paradigm's dominant thrusts or the interests of the dominant groups that they are

talked about but, by and large, ignored in practice.

In the proposed approach, market is important but balanced roles of market and state

are called for. Reforms are essential, but the present reform agenda must be recast

based on the prevailing realities on the ground as indicated above and guided by the

dynamics of a paradigm shift to sustainable development and participatory

democracy.

he concept of sustainable development, places the human being, rather than Tcapital, as is the case in the currently ruling paradigm, at the centre of policies

and programmes are undertaken to reduce socio-economic disparity (between the

rich and the poor and between men and women) and promote participation of people

at large in all processes- social, political, economic, environmental- of social

transformation. A crucial galvanising role of the cultural realities in promoting social

cohesion is recognised, which are brought into play. Participatory democracy ensures

equitable, active participation of people at large in the social transformation

processes. To that end, it calls for the institutionalisation of democracy at all levels of

society, including through appropriate devolution of political power to each level and

promotion of vertically and horizontally coordinated dynamic social capital (policies,

institutions, norms, values, ethics linkages) throughout society.

The proposed approach is thus guided by the vision to ensure equitable involvement

of all citizens in the social transformation processes, within a participatory democratic

framework. Obviously, a core concern relates to the promotion of social inclusion and

cohesion to replace the present sharp social division as between the people at large on

the one hand, and the power elites, on the other.

t is necessary for this approach that there are effective interactions across macro Iand micro levels so that macro policies are formulated by taking into account the

realities faced by the country from within and outside, and their implications work

through different levels of society, central to local/microin such a manner that

appropriate activities at the local spaces are properly promoted by the macro

framework involving policy, resource, and institutional support. The macro

126

he precipitous reduction of import tariff rates in the early 1990s, the import

unweighted average from 89 per cent in 1990-91 to 36 per cent in 1993-94 and Tthe import weighted average from 42 per cent to 24.1 per cent in 1993-94, without

allowing time and facilities to local industries to enhance their competitive ability, has

put many local industries- particularly in the small and tiny sectors- into severe

disadvantage viz-a-viz imports coming from relatively more efficient producers in

other countries. The tariff reduction process continued since then, and (import)

unweighted and weighted tariff rates were respectively down to 17.13 and 9.73 per

cent by 2001-02. The pace and pattern of tariff reductions introduced were out of step

with the prevailing realities related to manufacturing and marketing inefficiencies

obtained in many domestic industries. As a result, in certain cases, domestic industry

had to close down, and, in other cases, possible new units or expansion of existing

units could not be established. However, some mitigation in certain cases has been

available in terms of supplementary duties and sales tax imposed on imports. It is not

argued here that indiscriminate protection is provided to all industries indefinitely.

What is argued is that industries with potential for growth and export expansion

should be identified and protected as appropriate for a certain period of time. But this

has not been done in Bangladesh. It may be possible to find ways of appropriately

assisting such industries even now.

rivate sector's ability (financial, strategic planning, human capabilities) remains

limited in relation to the lead role assigned to it in the ongoing paradigm. The Psector is constrained by its trade orientation and persisting difficulties posed by less

than efficient banking services and underdeveloped capital market. It is also seriously

image-challenged due to the persisting loan default culture.

The efforts aimed at governance reforms have not succeeded much. Lack of

transparency and accountability, lack of rule of law, bureaucratic hindrances and

procrastination, lack of coordination among various ministries and agencies, lack of

political focus on real issues and corrupt practices all around remain pervasive. It

seems inherent in the dominant paradigm, which emphasises social division, that the

power elites are not genuinely interested in reforms to promote good governance,

because that would constrain their ability to seek benefits through abuse of power.

The basic problem with the ruling paradigm is that it is a divider of society. It enables

the power elites (economic, political, bureaucratic, military, professional) to acquire

more wealth as well as market, political and social power. The poorer segments of

society are expected to be either protected by safety net programmes or to benefit

from 'trickle-down' effects of economic growth. Trickle-down effects are of little avail,

as had been the case in the pre-reform period. In reality, the poorer segments of the

population remain deprived and excluded.

An Alternative ApproachThe alternative approach aimed at consolidating and building on the impressive

achievements in several respects and breaking out of the trap characterised by least

development, persisting widespread poverty, and sharp social division has necessarily

125

framework in turn should be adjusted on the basis of feedback from the local spaces. he paradigm shift, as proposed, will create conditions for and facilitate the release Tof the energies of people at large by opening up opportunities for their capability

development and equitable participation in the social transformation processes and

benefits, the maximisation of resource mobilisation, and an effective utilisation of

both the mobilised human power and financial and material resources at all levels of

society, leading to accelerated, equitable, sustainable national progress.

The conceptual basis and directional imperatives of the proposed alternative approach

have been outlined above. If the mindsets within the opinion forming, policy making,

and policy implementing circles- political, bureaucratic, professional- changed in

favour of this approach, the policy, programme and implementation details should

not be difficult to formulate and put in place.

(Dr Qazi Kholiquzzaman Ahmad (Q. K. Ahmad), an economist, is currently the chairman

of the multi-disciplinary research organisation Bangladesh Unnayan Parishad (BUP)

and the President of the Bangladesh Economic Association (BEA), Dhaka).

Statistical Tables

Table 1 : Bangladesh Macroeconomic Indicators (% of GDP)

Indicator 1991 -92

1992-93

1993 -94

1994 -95

1995 -96

1996 -97

1997 -98

1998-99

1999 -00

2000-01

2001 -02

2002 -03

Consumption 86.1 87.7 86.9 86.9 85.3 84.1 82.6 82.3 82.1 82.0 81.8 81.8

Public 4.5 5.0 4.9 4.6 4.4 4.4 4.7 4.6 4.6 4.5 5.0 5.0

Private 81.7 82.7 82.0 82.2 80.9 79.7 77.9 77.7 77.5 77.5 76.8 76.8

Domestic

savings

13.9 12.3 13.1 13.1 14.7 15.9 17.4 17.7 17.9 18.0 18.2 18.2

National savings 19.3 18.0 18.8 19.1 20.0 20.7 21.8 22.3 23.1 22.4 23.4 23.7

Total

investment

17.3 17.9 18.4 19.1 20.0 20.7 21.6 22.2 23.0 23.1 23.1 23.2

Public 7.0 6.5 6.6 6.7 6.4 7.0 6.4 6.7 7.8 7.2 6.4 6.7

Private 10.3 11.5 11.8 12.4 13.6 13.7 15.3 15.5 15.6 15.8 16.8 16.5

Total revenue 8.3 9.1 9.2 9.8 9.2 9.6 9.5 9.0 8.5 9.6 10.2 10.3

Total public

expenditure

13.0 13.0 15.0 14.4 13.9 13.3 12.9 13.6 14.5 14.8 14.9 14.5

Revenue exp. 6.6 6.8 6.7 6.7 7.0 6.8 7.1 7.5 7.7 8.1 8.3 8.4

ADP* 4.7 5.0 6.5 6.6 5.9 6.0 5.4 5.6 6.4 6.3 5.5 5.6

Other exp. 1.6 1.2 1.8 1.1 1.0 0.5 0.4 0.4 0.4 0.4 1.1 0.5

Overall budget

deficit

(excluding

grants)

-4.7 -3.8 -5.8 4.6 -4.7 -3.7 -3.4 -4.6 -6.1 -5.1 -4.7 -4.2

Overall budget

deficit

(including

grants)

-2.1 -1.3 -3.7 -2.2 -3.0 -2.0 -2.1 -3.2 -4.5 -4.1 -3.7 -3.4

Total public

financing

6.4 5.6 5.6 4.4 4.5 4.2 3.9 4.4 5.3 4.8 4.7 4.2

Net foreign

financing

4.5 4.5 3.8 3.8 2.8 2.8 2.3 2.5 2.5 2.0 2.1 2.3

Grants 2.6 2.6 2.1 2.3 1.7 1.7 1.3 1.3 1.5 1.1 1.0 0.8

Loan 2.5 2.7 2.5 2.2 1.9 1.8 1.7 1.9 1.8 1.8 2.0 2.5

Repayment of

capital

-0.7 -0.7 -0.8 -0.8 -0.8 -0.7 -0.7 -0.7 -0.8 -0.9 -0.9 -1.0

Internal

financing

1.9 1.2 1.8 0.7 1.8 1.5 1.6 1.9 2.8 2.8 2.6 1.8

Bank credit 1.2 0.2 0.6 0.0 1.0 0.9 0.6 0.9 1.5 1.1 0.9 0.4

Bangladesh

bank

-0.4 0.2 -0.3 0.2 1.1 0.8 0.4 0.5 0.7 0.8 0.7 -1.0

Commercial

bank

1.6 0.0 0.9 -0.2 -0.1 0.1 0.2 0.4 0.8 0.4 0.2 1.4

Public loan

(net)

0.7 0.9 1.2 0.7 0.8 0.5 1.0 1.0 1.4 1.7 1.7 1.4

Import 6.3 7.4 7.5 9.1 9.5 10.4 11.7 11.6 12.2 13.7 12.6 11.8

Export 11.3 12.7 12.4 15.4 16.9 16.9 17.1 17.5 17.8 19.9 18.0 17.4

Trade deficit -4.9 -5.3 -4.9 -6.2 -7.3 -6.5 -5.4 -5.9 -5.6 -6.1 -5.4 -5.6

Current amount

balance

-0.4 -0.8 -0.3 -1.8 -2.3 -1.3 -0.6 -0.9 0.0 -2.2 0.5 0.4

Net transfer

from abroad

3.4 4.9 6.8 6.9 4.0 3.6 3.4 2.9 3.6 3.0 3.5 4.1

GDP growth

rate (%)

5.0 4.6 4.1 4.9 4.6 5.4 5.2 4.9 5.9 5.3 4.4 5.3

Inflation (%) 4.6 2.7 3.3 8.9 6.7 2.5 7.0 8.9 3.4 1.6 2.4 5.2

Population

(million)

113.0 114.9 116.9 118.8 120.8 122.6 124.5 126.3 128.1 129.9 131.6 133.4

Source: MoF 2003, pp. 166-167

* ADP=Annual Development Programme

127 128

Table 5: Trends in CBN Poverty Ratio (Headcount rate) Upper poverty line Lower poverty line

1990 - 92 1995-96 2000 1991-92 1995-96 2000National UrbanRural

58.8 44.9

61.2

51.0 29.4

55.2

49.8 36.6

53.0

42.7 23.3

46.0

34.4 13.7

38.5

33.719.137.4

Source: World Bank 2003, p.

Note: CBN=Cost of basic needs

Table 6: 2001Population Growth Rates, 1974-

Census year

Growth rate (exponential)

1974 2.50 1981 2.33 1991 2.15 2001 1.54

Source: BBS 2003, p. 24

Household income groups (deciles)

1991-92 1995-96 2000

Total national

100.0

100.0

100.0Lowest 5%

1.0

0.9

0.9

Decile-1

2.6

2.2

2.4Decile-2

3.9

3.5

3.8Decile-3 5.0 4.5 4.5Decile-4 5.9 5.4 5.2Decile-5 7.1 6.4 6.1Decile-6 8.5 7.5 7.1Decile-7

10.1

9.2

8.4Decile-8

12.1

11.4

10.4Decile-9

15.6

15.4

13.9

Decile-10

29.2

34.7

38.1Top 5% 18.9 23.6 28.7

Source: BBS 2000, p.12

Table 4

Percentage Distribution of Income Accruing toHouseholds in Groups (Deciles), 199192-2000

End Notes1. Other sources, including the United Nations Fund for Population Activities (UNFPA), put

the population size significantly higher than the 2001 Population Census-based figures, at

146 million as of 2002-03 (as opposed to 133.4 million). In that case, the overall food grain

requirements would be higher by over 2 million MTs.2. If the total population (see note 1) of 146 million is considered, the number of poor people

would go up to 69 million, very close to the total population at the time o Liberation.3. The FDI inflow of US$ 328 million in 2002 was financed as follows: 50 per cent by equity,

31 per cent by reinvested earnings, and 19 per cent by intra-company loans. As against US$

328, Bangladesh Bank reports an amount of US$ 58 million on balance-of-payment basis

for 2002 (UNCTAD 2003, page. 42).4. Unemployment, as proportion of the total available person days a year [i.e. labour force x

300 (days) x 8 (hours a day)] is very high. Although a reliable figure is not available, about

40 per cent is usually mentioned. Both illiterate and literate people suffer from

unemployment and underemployment, particularly in rural areas. Moreover, the large

proportion of the employed population is engaged in urban informal and rural sectors, in

which wages and salaries are low.

130

Table 2: Millennium Development Goals: Bangladesh Status and Targets

MDG 1: Eradicate extreme poverty and hunger; 2015 target =halve 1990 $1 a day poverty and malnutrition rates

1991 - 92 2000 2015 Target

Upper poverty line

Lower poverty line

Squared poverty gap:

Upper poverty line

Lower poverty line

58.8

42.7

6.8

3.9

49.8

33.7

4.6

2.3

29.4

21.4

3.4

2.0

MDG 2:Achieve universal primary education; 2015 target = net enrollment to 100

1990 2000 2015

Gross primary enrollment rate (%) 77 97 100

1991 2000 2015

Primary completion rate (%) 40.7 67 100

MDG 3:Promote gender equality; 2005 target = education ratio to 100

1991 2000 2015

Female primary enrollment rate 66 97 100

1990 2000 2015

Female literacy rate 25.5 40.1 100

MDG 4: Reduce child mortality; 2015 target = reduce 1990 under 5 mortality by two-thirds

1990-91 2000 2015

Under-5 mortality rate

(per 1000 live births) 151 110 50

1990-91 1997-98 2015

Infant mortality rat

(per 1000 live births) 92 57 31

MDG 5: Improve maternal health; 2015 target = reduce 1990 maternal mortality by three-fourths

1990-91 1997-98 2015

Maternal mortality rate

(per 1000 live births) 4.7 3.0 1.2

MDG 6: Combat HIV/AIDS, malaria and other diseases; 2015 target=halt, and begin to reverse, AIDS

1990 2000 2015

Contraceptive prevalence rate

(% of women ages 15-49) 30.8 53.8 100

MDG 7: Ensure environmental sustainability

1990-91 2000 2015

Forest area as percentage of total area 13 10.2 15

Source: World Bank 2003, p.71

Table 3: Impact of Tariff Reforms on Import Tariff Rates, 1990-2002

Unweighted average %

Import weighted average%1990-91

89.0

42.0

1991-92

57.5

24.1

1992-93

47.4

23.6

1993-94 36.0 24.1

1994-95 25.9 20.8 1995-96 22.3 17.0 1996-97 21.5 18.0 1997-98

20.7

16.0

1998-99

20.3

14.1 1999-00

19.5

13.8

2000-01 18.6 15.12001-02 17.13 9.73

Source: Ahmad 2000, p.58; MoF 2003, p.45

129

Sri Lanka: Peace and Economic Reforms Dushni Weerakoon

IntroductionSri Lanka initiated an economic liberalisation programme in 1977- marking a radical

departure from an inward-looking, controlled-economy approach to a liberalised,

export-oriented strategy that laid the foundation for far reaching reforms in almost

all spheres of economic activity. Although during the following decade the reforms

transformed the Sri Lankan economy- moving it away from a predominantly

agriculture base to an increasingly industrialised and services oriented one- the

results during the decades of neo-liberal policies have, by and large, been mixed. The

under-performance of the economy has been blamed primarily on the costs incurred 1by two decades of a prolonged ethnic conflict in the country . In 2001, the economy

experienced its worst year of performance since the country gained independence in

1948, recording a sharp contraction in GDP growth. It was a culmination not only of

rising defence expenditures and adverse external conditions, but also of heightened 2political instability . In the midst of the economic crisis, the country saw the election

of a new government into office in December 2001 whose key objective of

resuscitating a deteriorating economic situation centred around efforts to resolve the

country's long-standing ethnic conflict and thereby build donor and investor

confidence in the economy.

he strategy paid off, albeit to a limited extent. A ceasefire brokered between the Tnewly elected United National Front (UNF) government and the Liberation

Tigers of Tamil Eelam (LTTE)- the main protagonists for separatism in the North and

East of the country- resulted in a return to some form of 'normalcy' in most parts of

the country. The government was also successful in having its policies- both on the

political and economic front- endorsed by international financial institutions and the

donor community. However, there was little doubt from the outset that major

challenges would lie ahead in building mass support for a 'peace deal' that could

involve a substantial degree of political devolution in the country and that the

government's ability to build support for its peace efforts would be critically

dependent on its performance in the economic arena. The complexities of the

challenges facing the country have been heightened by the decision to call for snap

elections in April 2004, four years before the term of the government was to end. In

this climate of uncertainty, this paper attempts to assess Sri Lanka's current

economic performance, and the prospects for sustained growth in the medium term

in the context of recent political developments in the country.

BibliographylQ. K. Ahmad, 'Bangladesh's Development Strategy and the Role of External Assistance,

German Assistance in Particular', in A.K.M.A Sabur (ed.), Development Cooperation at the

Dawn of the Twenty First Century: Bangladesh-German Partnership in Perspective,

(Dhaka: Bangladesh Institute of International and Strategic Studies (BIISS), 2002).lQ. K Ahmad and A. U Ahmed, 'Regional Cooperation in Flood Management in the Ganges-

Brahmaputra-Meghna Region: Bangladesh Perspective' in Natural Hazards, (The

Netherlands: Kluwer Academic Publishers, 2003), pp. 181-198.lQ. K. Ahmad, 'Remittances: A Major Thrust is Feasible', The Daily Star, Dhaka, 9

February, 2004.lBangladesh Bureau of Statistics (BBS), Government of Bangladesh (GoB), Preliminary

Report of Household Income and Expenditure Survey 2000, Dhaka, December 2001.lBBS 2003, GoB, Ministry of Planning, Population Census 2001, National Report

(Provisional), July 2003.lMinistry of Finance (MoF), GoB, Bangladesh Economic Review 2003 (Bangla version),

Dhaka, June 2003.lUnited Nations Conference on Trade and Development (UNCTAD), World Investment

Report, FDI Policies for Development: National and International Perspectives, New York

and Geneva, 2003.lWorld Bank, Bangladesh: Development Policy Review, Report no. 26154-BD, December

2003.

131 132

supported by an IMF/World Bank Enhanced Structural Adjustment Facility (ESAF)

with renewed emphasis on macroeconomic stability and further structural reforms,

but retaining the core elements of the poverty alleviation programme. While the

economy did indicate an improved outcome in terms of GDP growth in the two

decades of liberalisation, most data suggest that poverty may not have changed much

over the period (World Bank, 2002). Sri Lanka's experience in fact, is broadly in line

with emerging international evidence that the prescribed orthodox macroeconomic

policies of the IMF/World Bank had limits in terms of how far it could take countries

on the path toward equitable growth.

he mixed results achieved under neo-liberal programmes have also come to be Tacknowledged by international financial institutions. While stabilisation and

structural adjustment were considered to have had a measure of success, their

inability to ensure sustainability of renewed growth and address core concerns of

reducing the poverty gap within and between nations were being questioned. While

poverty alleviation remained a core concern, the nuance was more on the increase in 5inequality and its consequences . With the emphasis on closing the disparity between

the rich and poor countries, the search for new answers recognised the need for a

broader set of reforms- referred to collectively as 'second generation' reforms-

focused around the need to develop the institutional capacity for reforms. Questions

on the structure of the right institutions, improvement of the administrative, legal,

and regulatory functions of the state, and incentives and actions required for private

sector development were key concerns. Nonetheless, international financial

institutions such as the IMF and the World Bank have been at pains to argue that the

'first' and 'second' generation reforms were not sequential and early attention to

monetary policy, and growth and stability are seen as preconditions for attacking the

question of poverty through a broader set of reforms aimed at sustainable and

equitable growth. The IMF and the World Bank have, therefore, created a new

lending programme called the Poverty Reduction and Growth Facility (PRGF)

replacing the existing Enhanced Structural Adjustment Fund (ESAF) as an answer to

their critics. Its aim is to broadly explore alternative approaches to the reform

programmes and to commit to poverty reduction as an explicit goal of lending and

macroeconomic policies.

Current PerformanceSri Lanka experienced a fairly volatile period of economic growth in the latter half of

the 1990s that was to culminate with the country's worst year of economic

performance in 2001. Not only was the country burdened with intermittent drought

conditions that lowered agricultural production and contributed to power shortages,

but global economic conditions were also volatile with the East Asian financial crises

of 1997-98 and thereafter, the general slowdown in the global economy. In addition, 6renewed fighting in the North and East of the country strained fiscal management to

the point that Sri Lanka had to seek IMF balance of payments (BOP) assistance in

2001.


134

The Reform Process Sri Lanka's experiment with market reforms remained limited and partial in nature

in the 1980s (though extensive in comparison with the previous policy regime). It

included many of the standard reforms of a structural adjustment programme,

including liberalisation of trade and payments, rationalisation of public expenditure,

de-control of prices and interest rates, promotion of private sector development, 3foreign investment promotion and financial sector reforms . While the pace of

reforms slowed down considerably from the mid 1980s as the country became

embroiled in social and ethnic conflict, there was to be no significant reversal of

policy. In fact, the government adopted a 'second' phase of reforms in the late 1980s

in order to rejuvenate a flagging economy battered by civil strife. And despite a

change of government in 1994, Sri Lanka's commitment to a liberal, open economy

continued unabated. In fact, it was to be the first time in the country's post-

independence history that a change of government did not herald a reversal of

economic policy, generating optimism that a broad convergence on economic

ideology between Sri Lanka's major political parties would bring about a measure of 4policy consistency in the future .

The various phases of reform have seen a significant structural transformation of the

economy. The share of agriculture in GDP has declined from roughly 30 per cent at

the time reforms were initiated in the late 1970s to 20 per cent by late 1990s.

Concurrently, the shares of industry and services sectors have risen, with services

dominating with a share in excess of 50 per cent of GDP. Not surprisingly, Sri Lanka's

economic growth in the 1990s has come to be driven primarily by the services sector.

Despite the changes effected, Sri Lanka's experience with an open, liberal economic

policy regime has had its critics. The debate reflects fundamental divisions about the

pace and sequence of structural adjustment reforms; the desirability of 'shock

therapy' approach versus a more 'gradualist' approach to policy reforms. For some,

the staggered and slow pace of the liberalisation process in Sri Lanka- particularly in

areas of trade policy and privatisation- in itself has stunted the outcome of

liberalisation reforms (Lal and Rajapatirana, 1989; Athukorala and Rajapatirana,

2000). Others have argued that inherent tensions between the stabilisation and

structural adjustment programmes in timing, sequencing and problems of transition

played a key role in the staggered implementation of the liberalisation process, and

that such conflicting tensions in turn imposed domestic social and political pressure

on the reform agenda (Dunham and Kelegama, 1997). In fact, perceptions of inequity

in access to the benefits of market-driven policies are argued to have been a

contributory factor in heightening social and political tensions in the country in the

latter part of the 1980s (Dunham and Jayasuriya, 2001).

n response to the social upheaval experienced towards the end of the 1980s, the Igovernment adopted a considerably more populist and expansionary policy stance

during the 'second wave' of liberalisation during 1990-91. The policy agenda included

an ambitious poverty alleviation programme (the Janasaviya Programme) that

sought to address the issue of poverty directly, rather than merely leaving it to the

'trickle down' effects of accelerated GDP growth. The government's efforts were


133

income instruments.

he recovery on the export front, particularly of manufactured exports, was less Timpressive. The Sri Lankan economy retains a structural weakness in its

overwhelming dependence on the garments sector, accounting for over 40 per cent of

total industrial output and 50 per cent of export earnings. Given a high concentration

of markets (with the U.S. market alone accounting over 60 per cent of exports), the

garments sector remains highly vulnerable to external demand conditions. While

there were promising indications of a recovery in export earnings from the latter half

of 2002, the international competitiveness of the sector is of concern as it prepares to

meet the challenges of a quota free environment from 2005. The Sri Lankan

garments industry has primarily been quota driven and has benefited from the Multi

Fibre Arrangement (MFA). With the anticipated phase-out of the MFA at the end of

2004, the outlook for the sector remains fairly bleak. Even on a global scale, Sri

Lanka's garment export earnings have lagged behind other competitors (Table 2).

Countries such as Bangladesh and Mexico which were earning comparable amounts

from garments exports in 1990 have improved their position considerably in relation

to that of Sri Lanka's garments sector earnings in the 1990s.

evertheless, in overall terms, Sri Lanka appeared on the road to regaining Nmacroeconomic stability and renewed growth momentum. However, the

underlying political instability that had dogged the government since its election,

manifested in November 2003 with a decision by the Executive President to wrest

control over three key ministries of the government (including the all important one

of defence). In a follow up action, the President who has authority under the

Constitution to dissolve Parliament after one year in office, exercised her prerogative

and called for snap elections in April 2004. The uneasy cohabitation between the

President and Parliament that had generated some degree of uncertainty (given the

looming threat of dissolution of Parliament) has opened a new chapter in Sri Lanka's

economic and political future.

The Challenges AheadWhichever government is elected into office, there are fundamental challenges to be

met on the economic front. While estimates of poverty levels in the country differ, a


Table 1: Selected Macroeconomic Indicators

1998 1999 2000 2001 2002

Population growth

%

1.3

1.5

1.4

1.4

1.5

Per capita GNP

$

865

851

881

826

858

Unemployment

%

9.2

8.9

7.6

7.9

9.2

GDP growth

%

4.7

4.3

6.0

-1.5

4.0

Agriculture

%

2.5

4.5

1.8

-3.4

2.5

Industry

%

5.9

4.8

7.5

-2.1

1.0

Services

%

5.1

4.0

7.0

-0.5

6.0

Investment

% of GDP

25.1

27.3

28.0

22.0

21.3

Savings

% of GDP

19.1

19.5

17.4

15.8

14.6

Govt. expenditure

% of GDP

26.3

25.2

26.7

27.5

25.4

Govt. revenue

% of GDP

17.2

17.7

16.8

16.7

16.5

Fiscal balance

% of GDP

9.2

7.5

9.9

10.8

8.9

Public debt

% of GDP

90.8

95.1

96.9 103.2

105.3

DSRa

%

13.3

15.2

14.7

13.2

13.2

Rate of inflation

%

9.4

4.7

6.2

14.2

9.6

Interest rateb % 15.0 13.5 20.0 14.0 11.8

Exchange rate Rs/US$ 67.8 72.1 80.1 93.2 96.7

ASPIc 1985=100 597.3 572.5 447.6 621.0 815.1

Exports $ million 4798 4610 5522 4817 4699

Imports $ million 5889 5979 7320 5974 6106

Current A/C on BOP % of GDP -1.4 -3.6 -6.4 -1.5 -1.6

FDI $ million 137 177 173 82 230

Portfolio $ million -24 -13 -45 -11 25

External assets months of imports 5.9 5.2 3.5 4.5 4.9

Tourist arrivals

No.

381063 436440

400414

336794

393171

Notes: a. DSR=Debt Ser vice Ratio (percent of exports of goods and services); b. Reverse Repo rate; c.

ASPI=All Share Price Index.

Source: Central Bank of Sri Lanka, Annual Report, various issues.

135 136

beginnings. The exclusion of the LTTE from a pre-donor conference in Washington on the

grounds that it was a proscribed 'terrorist' organisation in the US was to be start of the

LTTE initiatives to signal a withdrawal from peace talks. 10. To support its fiscal policy stance, a Fiscal Management Responsibility Act (FMRA) setting

forth a 3-year budget framework, 6 month reporting responsibilities and provision to

safeguard against measures having an adverse pre-election fiscal effect was passed by

Parliament in December 2002.11. However, Sri Lanka's debt service ratio remains relatively low given the highly

concessionary nature of foreign debt.12. Repatriation of earnings from remittances has consistently accounted for 6-8 per cent of

GDP and has been a mainstay of the Sri Lankan economy in the last two decades. 13. In fact, the UNF was having to deal with rising labour unrest from the end of 2003.14. The incumbent President will not be allowed to run for office under the Constitutional

limitations of only two terms in office.

BibliographylN. S. Jayasuriya and S. Kelegama, 'The Economic Cost of the War in Sri

Lanka', Macroeconomic Policy and Planning Series no. 13, (Colombo: Institute of Policy

Studies, 2000).lP. Athukorala and S. Rajapatirana, Liberalisation and Industrial Transformation: Sri

Lanka in International Perspective, (New Delhi: Oxford University Press, India, 2000).lP. Athukorala and S. Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri

Lanka, 1969-90, (Washington, D.C.: The World Bank, 1991).lA. Cuthbertson and P. Athukorala, 'Sri Lanka' in D. Papageorgiou et. al (eds.), Liberalising

Foreign Trade, (Oxford: Basil Blackwell, 1991).lD. Dunham and S. Jayasuriya, 'Liberalisation and Political Decay: Sri Lanka's Journey

from Welfare State to a Brutalised Society', Pravada, vol. 7, no. 7., 2001.lD. Dunham and S. Kelegama, 'Does Leadership Matter in the Economic Reform Process?:

Liberalisation and Governance in Sri Lanka, 1989-93', World Development, vol. 25, no. 2,

1997.lGovernment of Sri Lanka, 'Regaining Sri Lanka: Vision and Strategy for Accelerated

Development,' Ministry of Policy Development and Implementation, Colombo, 2002.lGovernment of Sri Lanka, , 'Sri Lanka: A Framework for Poverty Reduction', External

Resources Department, Ministry of Policy Development and Implementation, Colombo,

2000.lS. Kelegama, 'Economic Development in Sri Lanka during the 50 Years of Independence:

What Went Wrong?', Occasional Paper no. 53, Research and Information System for the

Non-Aligned and Other Developing Countries, New Delhi, 1998.lD. Lal and S. Rajapatirana, 1989, Impediments to Trade Liberalisation in Sri Lanka,

(U.K., London: Trade Policy Research Centre, 1989).

Arunatilake,


138

widely accepted conservative estimate is that nearly 25 per cent of Sri Lanka's

population remains below the poverty line (GOSL, 2000). Although the incidence of


Table 2: Exports of Garments of Selected Economies, 1990-2001

US $ Million

Share in total merchandise

exports (%)

1990

1995

1999

2000

2001

1990

2001

Bangladesh 643 1,969 3,721 4,244 5,111 38.5 78.3

China 9,669 24,049 30,078 36,071 36,650 15.6 13.8

India 2,530 4,110 5,153 6,030 n.a. 14.1 14.2

Indonesia 1,646 3,376 3,857 4,734 4,531 6.4 8.0

Jordan 11 29 58 115 296 1.0 12.9

Mexico

587

2,731

7,772

8,631

8,011

1.4

5.1

Sri Lanka

638

1,758

2,287

2,812

2,398

33.4

49.8

Turkey 3,331 6,119 6,516 6,533 6,627 25.7 21.2

Source: WTO, International Trade Statistics (2002).

137


139 140


at home relate to its geography, history, culture, traditions and their impact on

institutional and legal arrangements which may or may not be friendly to economic

development. The external factors comprise Nepal's economic and cultural relations

with the outside world that have been growing at a faster pace after 1950 (Sharma,

1998c), the year of democratic innovation. Particularly, years like 1955, 1956, 1959

and 1961 are noteworthy. 1955 is the year in which Nepal joined the United Nations.

In the year 1956, Nepal initiated the process of modern development by way of

introducing planning exercises with the support of foreign assistance. It also

established a central bank, the Nepal Rastra Bank, regulating domestic currency as

well as foreign exchange in the same year. A national university, the Tribhuvan

University, was set up in 1959. The most significant year was 1961 when Nepal became

a member of IMF and World Bank, but failed to join GATT, a fact it regretted when

India imposed trade sanctions in 1989.

The relations with China in the north, however, have not been bitter after 1959

(Sharma 1998c). Steps promoting economic cooperation, helping capital formation

and technology transfer, led to the impressive growth of modern sectors, mainly

concentrated in urban and suburban areas which are in direct and impressive contact

with the international world, leaving rural areas in isolation. It was also felt that the

so-called modern steps helped reduce trade dependency on India, which was almost

100 per cent until the early 1960s. Instead, Nepal was efficient in diverting its trade

transactions towards other countries. What has emerged today is that Nepal faces

equally huge deficits in trade with India and other countries (Sharma 2000a). As a

consequence, linkages of income and employment occurred at home. Besides, trade

deficits have also resulted in foreign exchange gap, the mitigation of which required

either the export of services or the inflow of official as well as private capital. In a

situation where Nepal has a weak export base, dependence on foreign capital is

substantially high (Sharma, 1998b).

he situation could have been made favourable by raising rates of participation in Tthe development of all kinds of resources all over the country (Sharma, 2004),

given the economically viable geographical and cultural heritage and diversities in

human and other natural resources. By way of harnessing the stock of this wealth,

Nepal could have strengthened its economic position long ago as was done by other

nations like Korea, China, and India, who initiated the dynamic process of

development in the same period.

Indeed, Nepal (see Sharma, 2002) has an area of 147181sq. km. It is split into three

zones; namely, hill, mountain and terai. The altitude of the Himalayan range (includes

35 per cent of the land area where 7.3 per cent of the population lives) varies between

4877-8848 meters. This range includes the top mountains like Mount Everest and

Kanchan Jangha which are, respectively, the first and third highest in the world. The

range covers many such beautiful mountains, which have been the perpetual source of

river flows, spring water and snowfalls. The economic viability of this zone is explicitly

demonstrated when attraction is provided to tourists and wild life, and impetus for

growth is given to agriculture and industry. It is helpful in power generation and

142

Nepal: Low Equilibrium TrapDr Gunanidhi Sharma

Economic Setting Nepal as a nation state has a history of more than 3000 years. It ranks seventeenth

among the old states in the world. Its present shape, however, is a result of the 1816

treaty with British India. The country was ruled by feudal lords and aristocrats till the

installation of democracy in 1950. From 1950 till today, democracy could not be

stabilised due to the institutionally ambitious and expensive monarchy and the

ambiguous role of Nepal's close foreign allies who remained supportive of traditional

forces because of the China factor. Of course, Nepal gained in terms of external

assistance, but it had to bear a high cost due to political instability which led to

inadequate socio-economic transformations unable to realise the twin goals of a

modern society i.e. higher growth rate and distributive justice (Sharma, 1998a).

The Nepalese society today is economically highly fragmented, unequal and distorted

(Sharma, 1998a, 2000b and 2004). This is happening amidst a resource base which

is considered strong and viable by any indicators of natural, cultural and human

wealth. The capital base remained highly volatile due to rulers' keeping their assets

abroad. This led to serious economic effects resulting in low degree of

industrialisation and agricultural transformation, massive unemployment, deepening

poverty, social discrimination and deprivation, inequality and external dependence.

Even after almost 50 years of planned development, the country is unable to

overcome structural deficiency, rigidity and development disparity (Shrestha, 1998).

Instead, major areas and population of the country are kept outside the market net.

The eventual consequence for the economy has been the low resource efficiency and

productivity all over the country leading to absolute poverty, income disparity and

unemployment as well as low income and saving. This has had a negative effect on

investment and growth. The country today is economically in a low equilibrium

population trap, which is undermining the smooth transition of the so-called

traditional economy to a modern and diversified structure suitable for the competitive

world under the WTO framework (World Bank, 2004).

he intent of this paper, therefore, is to present an overview of the Nepalese Teconomy which is joining the WTO and is waiting for prosperity and justice

required for dynamic social changes without discrimination, deprivation and cultural

fragmentation- the genesis of the current crisis. The paper, for this purpose, is split

into various sections. Let us discuss the current state of the economy first.

Institutional Framework and Resource PositionThe Nepalese economy is determined by forces both at home and abroad. The factors


141

The situation would have been neutralised had the industrial sector grown faster.

Unfortunately, this sector too grew by 2.3 per cent in 2003. It resulted in 14 per cent

of unemployment and 50 per cent of under-employment. Again, inequality measured

by GINI coefficient in a decade increased from 0.31 to 0.36 (CBS, 1997) with its

aggravating effect on poverty ratio, which has been 42 per cent for decades.

he situation is further worsened by the urban and India-centric policy of the Tgovernment (Sharma, 1998c and Khatri, 1997) which is market friendly in

character. The urban character is demonstrated by per-capita income for rural Nepal,

which is half of NRs. 25,000 in Kathmandu (CBS, 1997). It is also evident from the

concentration of developmental infrastructure such as electricity, communications,

roads and health services in urban areas, which are the established commercial

centres (Sharma, 2004). This is further worsened by the historically unjust economic

relations based on feudal practices which favour a few of the urban elite, the already

privileged, development brokers and those who are wealthy in the rural areas. It is

held:

'…….Anti-poor, biased distribution of productive assets like land, ownership of

enterprises, lending and investment of financial institutions, employment and self-

employment opportunities, urban centric development activities, without proper

distribution across regions, etc, on the one hand, and the flat rate of land tax, rebates

to bigger investment, collateral based credit system, absence of protection to cottage

and small industries employing indigenous labour, etc, on the other, are the defective

traditions……..Similarly, urban biased policies in energy, transportation and

communication, health and education, banking, finance, insurance and industries

have left the resources oi [the] countryside unused, inefficiently used, non-

monetised….The situation is further aggravated by the corruption at the government

level whose policies have been too unrealistic in view of the country's reality, as they

favour those who have inherited huge property'. (Sharma, 2000b, pp.20-21)

overnment policy is India-centric by virtue of Nepal's 1950 treaty with India, Gwhich is committed to national treatment of citizens of each nation. Due to this

and also since Nepal lags behind the technologically and institutionally stronger India,

shocks in any forms- natural, institutional, economic, technological or market related-

in India are easily transmitted to Nepal, which is unable to bear the burden of an open

but unrestricted border and full convertibility of the Indian currency. The compulsion

of the 1950 treaty with India is that Nepal cannot remain independent of Indian

policy. Nepal must passively adjust its major macroeconomic policies including fiscal,

monetary, trade, labour, investment, exchange rates, price, etc, in view of the policy

choices in India. This implies that Nepal cannot independently apply any policy and

use discretionary power as per local needs. Together with a feudal legacy on all fronts

Nepal has failed to achieve the planned objectives of poverty reduction, higher growth

rate, satisfactory level of employment, favourable balance of payments, etc. Nepal's

chronic problems at this juncture are poverty (42 per cent of the population is below

poverty line), under-employment (50 per cent of the labour force) and unemployment

(14 per cent of the labour force growing by 300 thousand a year). Of these, the huge

healthy manpower supply. The hilly region covers 42 per cent land area where 46 per

cent of the population resides. Its height ranges between 610-4877 meters. This range

includes many valleys, green forests and fertile lands because of which the population

density of this zone is high. It is a land scarce region, and, hence, intensive farming

practices prevail here. This region is rich in vegetation and cultural diversities and is

suitable for cultivation, trekking and tourism. The Terai region is conceded as the

most viable region for cultivation and, therefore, is a granary for the country. It is also

rich in biodiversity and cultural heritage. Lumbini, the birthplace of Buddha, is a

renowned place for tourism. There are a number of national parks in this range.

Nepal's human resource position is adequate considering that Nepal gets remittances

to the tune of almost one billion dollars (informally estimated).

epal has both natural and human resources. What is required is an efficient Nharnessing of these resources. Efforts in this direction have been made in the

past, through a planned process of development. However, because of policy biases

towards macroeconomic adjustment (Sharma, 2004) and the inability of the

government to harness and manage resources properly, and also due to the rapidly

growing population (at the rate of more than 2.2 per cent annually), the situation has

deteriorated. There is rapid depletion of natural resources on which households have

depended for centuries for their livelihood. In the absence of appropriate micro-level

programs for rehabilitation poverty has increased. There is substantial population

pressure on the urban centres, causing many other distortions and anomalies. Nepal

also exports poverty historically through emigration. As there is low attraction at

home, skilled and efficient manpower is repatriated, making the economy further

inefficient. In addition, as a consequence of a defective public policy of aggressive

liberalisation and privatisation after 1990, income disparity under the feudal social

setup has been further enhanced. All these factors helped fuel the Maoist movement.

ata (see World Bank, 2004; CBS, 2002 and 1997; ICIMOD, 1997; MOF, 2003) Dreveals that Nepal's population is growing at the rate of 2.2 per cent annually

and it has now exceeded 24 million. The growth rate of GDP in 2002, however,

remained negative. In 2003, it was positive but 2.3 per cent only. Compared to a

population growth rate of 2.2 per cent, the growth of GDP in real per capita term

remained only 0.1 per cent. The poverty ratio over decades has been constant at 42

per cent. The ratio of urban population in 2001 was only 13 per cent. The literacy rate

is around 55 per cent. While the gross domestic savings to GDP ratio in 2003 was only

11.3 per cent, the ratio for investment for the same year was found to be 26.1 per cent.

The savings gap, thus, is almost 15 per cent. This gap is met through foreign assistance

in which the loan component is as high as almost 70 per cent. The foreign debt-GDP

ratio accounts more than 50 per cent. The debt repayment ratio is around 5 per cent

of GDP (Sharma, 1998b).

Agriculture is still a dominant sector of the economy, which contributes 40 per cent to

the GDP. Given the ratio of population dependant upon agriculture- more than 75 per

cent- and the growth performance of it (2.1 per cent in 2003), it is revealed that this

large sector of the economy where poverty is concentrated is yet to be modernised.


143 144

or in any other skill-based activities. Even in the unskilled category, Indian labour is

hard working. The conclusion is that in order to exploit growing opportunities of

entering into the global market and to compete with MNCs at home, Nepal needs

structural overhauling. It is getting assurances as well as external assistance from

donors, individually and multilaterally, in this direction.

ConclusionNepal, of course, has a large opportunity for economic development, given

economically viable resource endowments. Efforts in this regard have been made in

the past four or more decades, beginning in the 1950s. It, however, appears that little

is realised in terms of achievements, in sectoral performance or indicators of

development affecting quality of life and social transformation. This situation is

worsening. This is mainly because of the defective economic policies of the

government. While the role of a welfare state and hence the ground for public

intervention has been substantially reduced, the tradition bound socio-economic

structure based on deep-rooted feudal institutions is benefiting only a few. A majority

of the people, therefore, are deprived of social opportunities that could make them

economically well off. Again, when economic power backs political power, politics is

centred in the hand of already well to do families. This cycle is repeated when

economic and political powers re-enforce each other and the rich but resourceful

people resist any fundamental change against their compounded interests. The society

in Nepal, therefore, is experiencing excessive negative shocks because of which it is

losing active dynamism, and hence progress is slow. Besides, the present governance

structure is highly centralised keeping many parts of the country alienated from

power centres. Subsequently, poverty, discrimination, deprivation and inequality

across family and regions are substantiated and sustained. The seeds of crisis are now

exploding in the form of the Maoist insurgency which effects the present as well as the

future of the Nepalese economy and society. The crisis of governance and economy

needs to be tackled with vision.

(Dr Gunanidhi Sharma is professor of Economics at Tribhuvan University, Kathmandu

and has written extensively on the Nepalese economy).

BibliographylCBS, Population Census 2001: National Report, (Kathmandu: CBS and UNFPA,

Kathmandu, 2002).lCBS, Nepal Living Standards Survey Report 1996, (Kathmandu: CBS, 1997).lHMG, Constitution of the Kingdom of Nepal-1990, MOLaw/HMG, Kathmandu, 1992.lICIMOD, Districts of Nepal: Indicators of Development, (Kathmandu: ICIMOD, 1997).lSridhar K. Khatri, 'Nepal in the International System: the Limits of Power of a Small State',

in Anand Aditya (ed.), The Political Economy of The Small States, (Kathmandu: NEFAS

and FES, 1997).lMOF (2003), Economic Survey, MOF, Kathmandu.lDevendra Raj Panday, Nepal's Failed Development: Reflections of the Mission and

Maladies, ( Kathmandu: Nepal South Asia Center, 1999).lA. D. Pant (ed.), Planning and the Rural Poor, (Allahabad, Thinkers Library: The

Technical Publishing House, 1997).lGunanidhi Sharma, 'Participatory Democracy in Nepal: Its Economic Dimensions in


146

and fast growing trade deficit (total trade deficit in a year is more than 15 per cent of

GDP, which amounts to NRs. 80 billion, and deficit with India alone is NRs. 26

billion) may also be the cause for the other two, as more imports of goods and services

imply loss of employment and income with negative repercussions on savings and

investment. India's abnormal profit motive reflected in trade negotiations and tariff

and non-tariff barriers imposed infrequently upon Nepal is also causing heavy trade

deficit and hence, damage to the Nepalese economy.

he eventual effects of these losses are found in the Maoist insurgency, which Terupted eight years back in 1996 and continues in violent disruptions. There is a

huge loss of social opportunities, life and property. Social opportunities are lost when

more development fund in the budget is diverted towards military expenditure with

direct negative impact on social expenditure or opportunities. Some ten thousand

people have already died and physical infrastructure has been damaged. The loss of

property is yet to be estimated. Speculation is that Nepal directly lost more than five

billion NRs. worth of public property. The losses in terms of lower growth rates of

income and employment, their further aggravating effects on trade deficit,

repatriation of human resource and capital abroad and the cycle of downswing in

economic activities reflected in declining values of income and employment

multipliers have not been estimated so far.

Scope of Economic ModernisationThe role of natural, social and cultural endowments in economic development needs

not be reiterated. Given the stock of national wealth in Nepal, what is theoretically

taken for granted is that resources are not the constraining factors at least in this

technology-driven world where the resource efficiency as an essential condition for

growth may be sufficiently enhanced through the application of recent know how in

all fields of organisation, management, production, supply and marketing. If initial

conditions are the necessary condition for accelerating the process of economic

growth, the sufficient conditions, undoubtedly, are access to market and expansion of

institutional capabilities. The climate for higher growth and development is

deteriorating. This weakness is felt even more when the country is becoming market

friendly and committed to liberalisation and privatisation. Nepal, at present, is

confronted with high aspirations from newly acquired membership of WTO and the

primitive state of the commodity and service sectors, which are less exposed to

corporate culture.

nstitutionally, culturally and technologically, Nepal, however, lags much behind Iother countries in competitive supply. The reason is that, on the one hand, it is in

the list of least developed countries, as indicated by indexes, including human

development, growth rate, poverty, inflow of FDI, etc. On the other hand, its

dominant sector of the economy, namely agriculture, is traditional. It is not

competent even in manufacturing and service related activities. Studies conclude that

Nepalese labour is 20 per cent less efficient than Bangladeshi labour. Their efficiency

is not comparable to their Indian counterpart, as witnessed by their replacement by

Indians in the Nepalese labour market, whether it is in construction, manufacturing


145

Nepal', paper presented to a seminar on Participatory Democracy in Nepal, organised by

Nepal Centre for Contemporary Studies, Kathmandu, 2004.lGunanidhi Sharma, 'Infrastructure, Service Delivery and Accessibility in Mountains and

Hills of Nepal', Economic Journal of Development Issues, vol. 3, no.1, 2002.lGunanidhi Sharma, 'Dependency and the Question of Sovereignty: The Nepalese

Experience', in Khadga K. C. (ed.), The Institutionalization of Democratic Polity in Nepal,

( Pokhara: Department of Political Science/ Sociology P. N. Campus, 2000a). lGunanidhi Sharma, Nepal: Missing Elements in the Development Thinking, (New Delhi:

Nirala Publications, 2000b).lGunanidhi Sharma, 'The Economy of Nepal: A Macroeconomic Overview', in Pashupati

Shumsher, J. B. Rana and Dwarika Nath Dhungel (eds.), Contemporary Nepal, (New

Delhi: Vikas Publishing House, 1998a).lGunanidhi Sharma, 'The Growing Fiscal Imbalance in Nepal: Are We Really Falling Into

The Debt Trap', in Gunanidhi Sharma, Dev Raj Dahal and Hari Uprety (eds.), Debt Trap

And Its Management In Nepal, (Kathmandu: NEFAS and FES, 1998b).lGunanidhi Sharma, 'Economic Aspect of Nepalese Foreign Policy', Nepali Political Science

and Politics, vol. 6&7, 1998c.lShrestha, In the Name of Development: A Reflection of Nepal, Educational Enterprises,

Kathmandu, 1998.lHari Upreti, Crisis of Governance, GDS, Kathmandu, 1996.lWorld Bank, Nepal: Country Assistance Strategy, Nepal Office Kathmandu.


Caste Politics in IndiaAditya Nigam

olitics in contemporary India is marked by the 'resurgence' of 'caste politics'. In a

sense, this is true. The past two decades have seen a dramatic collapse of the old Ppolitical formations and parties which had dominated the politics of the Nehruvian

1era . Even the movements of that period, right up to the mid-1970s, were largely

movements on economic issues and questions of corruption, black-marketing,

hoarding and food shortages. Through the decade of the 1980s, there was a gradual

erosion of the Nehruvian secular-nationalist imagination, and one of the factors

responsible for it was the 're-emergence' of caste in public discourse.

The watershed in this respect of course, was the famous 'Mandal Commission'

agitation which has become something of a metaphor in contemporary Indian politics.

The Commission, which was instituted in 1978 during the Janata Party government,

under the stewardship of B.P. Mandal, a socialist leader from a 'backward caste', was

given the task of looking into the question of 'backwardness' of certain castes and

suggest remedies for its redressal. For about a decade after it submitted its

recommendations in 1980, these lay in cold storage after the Congress- under the

leadership of Mrs Indira Gandhi (subsequently taken charge of by her son Rajiv)-

returned to power. It was implemented under extremely contentious circumstances in

1990 under the prime ministership of V.P. Singh. As is well-known, its main

recommendations included 27 per cent reservations in public employment for these

castes (known in India as the 'Other Backward Classes' or OBCs).

s soon as the government announced its decision to implement the Commission's Arecommendations, all hell broke loose. There were widespread violent agitations

all over North India with sons and daughters of 'respectable families' taking to the

streets. It was an unprecedented sight to see these young people, generally cynical

about all political activity, taking to road blockades, demonstrations, picketing and

such other activities. Some of them even committed self-immolation. Equally

interesting was the sight of the usually cynical media backing the agitators to the hilt.

New terms like 'mandalisation of politics' entered political discourse. The tone and

tenor of the public debate in the media was illuminating for a whole generation of

people who had been brought up in modern secular values of the Nehruvian era. This

was especially so because they seemed to suggest, almost one-sidedly, that caste was

something that we had already left behind and it was the vileness of VP Singh, who

wanted to cash in on such retrograde sentiments for purely pragmatic electoral

purposes.

147 148

immaculate modernist as he was, was the one who finally legitimised this position

thus: 'If we go in for reservations on communal and caste basis, we swamp the bright 4and able people and remain second-rate or third-rate' . On this one question the

Nehruvian elite and the Hindu Right were always in complete agreement.

as Nehru a casteist then? Were all those who opposed the Mandal commission Win the 1990s, includeding respected scholars of the country, also casteist? This 5is a question that is being asked today by the Dalitbahujans . My answer to this

question would be that they were not casteists- at least a large section of them were

not. They were opposing the 'bringing in' of caste into public discourse on very

modernist and secular grounds. They sincerely believed that talking in terms of caste

would be a regression into the past that they were so desperately seeking to annihilate.

The point that needs to be stressed here is that this time round, caste was the banner

of those who had been oppressed by it. The recalcitrance of caste is not a mere

repetition of the older story. For in that story, it was the upper castes that held aloft

the banner of caste in order to put people 'in their place'. Now things had decisively

changed; the upper castes were in constant and vehement denial. Somewhere here in

this denial lies hidden the story of Indian modernity. In what follows, I will sketch

what I believe are the broad outlines of that story and underline some of the

complexities of present-day caste politics.

Modernity and Caste PoliticsIs there really a 'resurgence' of caste? Is it the case that the question of caste has

'suddenly' become important, implying thereby that till now such was not the case? Is

the general perception that was aired in the media during the Mandal Commission

controversy- that caste was simply resurrected by VP Singh- a correct perception? The

answer is both 'yes' and 'no'. Yes, because there was a sense in which caste had been

banished from public discourse and to that extent, its reappearance is a new

phenomenon. No, because this unpseakability of caste in public discourse was limited

to civil society, that is, to the domain of the secular modern institutions of society. It

had not disappeared from society at large. In another realm, away from the watchful

gaze of the modern elite, in the domain of what Partha Chatterjee calls political

society, caste was a central category that framed the common ways of seeing and

being in the world. The secret story of our modernity is of course, lodged in the first

realm, that of civil society, for it is here that we see the mutated upper-caste modern

Indian Self, in perpetual denial of caste (and to some extent, religion) in all his/her

splendour. There is no denying that this modern 'Self' is really and genuinely modern;

it wants to excise that shameful thing called caste from its memory. The upper-caste-

turned-modern Self does not ever want to be reminded of this one aspect of his/her

inheritance. It can deal with religion, for that is something that 'we all have' whether

we are from the West or from the East. But caste is a blot that has affected the psyche

of the mutated modern in ways that can be best expressed in Freudian terms: Caste is

the suppressed/repressed, the 'unconscious' as it were, of the modern moral Self (the

Superego?). Yet, caste is the hidden principle that gives it the access to all kinds of

modern privileges precisely because it functions, as Deshpande suggests, as

cultural/symbolic capital.


150

t needs to be borne in mind that this large group of OBCs, who constitute close to

60 per cent of the population, had a negligible presence of about 4 per cent in Igovernment employment when these recommendations were implemented. Also

worth bearing in mind is the fact that even this small representation in employment

was restricted to the lower rungs of government jobs. In other words, the

overwhelming majority of public services were monopolised by the small crust of

upper castes. In one estimation made by sociologist Satish Deshpande, about 20 per

cent of the population controlled about 95 per cent of all jobs. Deshpande has also

recently calculated the poverty-caste relationship on the basis of the National Sample

Survey Organisation consumption data which confirm the strong relationship 2between low-caste status and poverty . However, what is relevant here is not merely

the incidence of poverty among different 'backward' caste groups but more

importantly, the fact that even among the relatively better-off and educated sections

of Dalits (the Untouchable castes) and OBCs, access to public employment, especially

at the higher levels, is severely restricted. In other words, as Ram Naresh Kushwaha,

an OBC parliamentarian had put it in a parliament debate in 1978, the upper castes

have always had informal reservations operating for them in employment; jobs were

reserved for them. Manusmriti itself, he had claimed, was nothing other than a 3reservation of certain jobs for only a certain category of people .

hat was interesting about the agitation and the highly charged public debate Wthat followed, was that it was entirely conducted from the side of the

opponents of the Mandal Commission, in the most immaculate secular and modern

language of 'merit' and 'efficiency'. The question was posed as one of dilution, if not

the elimination, of merit at the cost of getting in 'unworthy' and 'undeserving' people

simply because they happened to belong to certain castes. 'Would you like to be

operated upon by a doctor who had become one through reservations?', 'Would you

like to fly by an aircraft that was piloted by a reservation pilot?'; such were the kinds

of questions that were asked by the anti-Mandalites in these discussions. Not once

was the question of upper-caste and brahminical privilege ever articulated as a

question of caste-privilege. Even more interesting was the fact that the more

sophisticated among the anti-Mandalites were prepared to accept that there was a

question of privilege involved here but that should be addressed in terms of 'class':

that 'economic' rather than caste criteria should be made the basis of reservations.

The question was really one of poverty, they argued, rather than that of caste.

While this argument actually erupted in public discourse in the 1990s, it has a fairly

long and hallowed history. As evidence shows, it was an argument that had been

rehearsed over the decades by the modernist upper-caste leadership. Right from the

days of the Kaka Kalelkar Commission, set up in the mid-1950s for the purpose of

addressing the same questions that were later taken up by the Mandal Commission, to

parliamentary debates and more localised public discussions, this was invariably the

argument deployed by the opponents of positive discrimination. As Christohpe

Jaffrelot shows, many members of the Kaka Kalelkar commission dissented from the

commission's recommendations and what is more, the Gandhian Kaka Kalelkar

himself started developing serious doubts even as he submitted his report. Nehru, the


149

and formed a government with the BJP in UP, and its top leaders even campaigned

for it in Gujarat during the subsequent elections.

here are two levels of problems involved here; first, the actual relations between Tdifferent caste groups and second, the logic of electoral politics. On the face of it,

it only seems logical that in order to break upper-caste hegemony there should be a

larger alliance of the OBCs and Dalits. This had seemed to be a promising line of

action to many leaders of the late nineteenth and early twentieth century, like Jyotiba

Phule of Maharashtra and Periyar EVR Ramasamy Naicker of what is today Tamil

Nadu. Hence they had advocated the idea of a 'Nonbrahmin' unity (Periyar) or a unity

of the Shudraatishudras (Phule) in order to challenge the hegemony of the

brahminical elite. And up to a point this did have an impact in the first half of the

twentieth century, in so far as the brahminical stranglehold over society in these two

regions was seriously challenged. Even Kanshi Ram, the chief architect of the present

Dalit upsurge in North India, believed that his party should not simply be a Dalit

party but a party of 'bahujans' (literally, majority); hence the name, Bahujan Samaj

Party. The bahujan samaj, in Kanshi Ram's rendering was to be forged through a

broad alliance of the Dalits, the backwards and the minorities, particularly the

Muslims. Kanshi Ram also saw clearly that the Dalits alone, comprising not more than

about 20 per cent of the electorate in any constituency, could not possibly challenge

upper-caste dominance. Hence the aggressive slogan of the period of the rise of the

Bahujan Samaj Party (BSP): ' (thrash

the Brahmin, the Bania and the Rajput with shoes)'. That was the astute strategy that

managed to make BSP an important force in its early days.

The problem, however, began after the first alliance of the Bahujan Samaj Party (BSP)

and the Samajwadi Party led by Mulayam Singh Yadav, representing the backward

castes, formed its government in UP in 1993. Within a short time it became apparent

that as soon as the political pact that was forged between the parties moved towards

the countryside, sharp conflicts between the two groups began playing themselves out.

It was during the panchayat elections that the conflicts became really serious and

many Dalit leaders and intellectuals realised that much of their present conflict in the

villages was with the dominant backward castes who had consolidated their hold

following the post-independence land reforms. In many states, it was these castes,

comprising the erstwhile tenants, who had by now become landowners, who were

their main oppressors. And they were not willing to change their attitude towards

Dalits in everyday matters, even in the face of the political alliance at the state level. In

many areas it was they who had been preventing the Dalits even from casting their

votes.

ore importantly, this was the period of the sharp rise of the Hindu Right. Very Msoon, this threat of the Sangh combine was to become the most important

reference point for all future electoral-political alliances. The parties of the OBCs,

represented by Mulayam Singh and Laloo Yadav in the two most important northern

states of UP and Bihar, positioned themselves firmly against the BJP and the Sangh

combine. It is worth remembering that in the period of the build-up to the demolition

Tilak, tarazu aur talwar/ inko maro joote chaar

o the oppressed castes, especially the lowest among them- the Dalits or the

untouchables- this repression of caste appears as a conspiracy of the brahminical Tcastes to deprive them of their voice. It appears to them to displace what is their bitter

lived experience to another domain- that of class, for instance. The story that the

Dalit wants to narrate can only be told with reference to the history of caste

oppression. It is there that the secret of their exclusion and cultural mutilation lies.

One of the critical elements of the recalcitrance of caste in contemporary Indian

politics is, therefore, the search for a past, a cultural legacy, a history and a sense of

Self. The oppressive structure of caste functioned, in relation to the Dalits in

particular, through their almost complete exclusion from 'society', such as it was. Here

I will not go into stories of daily humiliation and degradation that were and have been

part of Dalit life, as these are by now fairly well articulated, documented and

discussed. I will briefly refer to one aspect of their exclusion: their exclusion from any

kind of access to learning- of whatever kind, including elementary skills of reading

and writing. The implications of this forced exclusion are far greater than might

appear at first glance. This took away from them any possibility of registering their

own history, creating their myths and literature, in other words, deprived them of any

sense of their own past. It was, therefore, only with the arrival of colonialism and the

opening up of public spaces and institutions to the Dalits, if in a limited fashion

(because of upper caste opposition) that these became accessible to them. It is,

therefore, only in the early twentieth century, strictly speaking, that the Dalits really

found their voice in the sense of being able to record their experience of oppression

and talk about it publicly. And it was at this precise moment that the mutated upper-

caste modern began to legislate a certain modern universalist language, decrying all

attempts to talk of caste oppression as 'casteism', a sign of 'backward consciousness'.

There is, therefore, a peculiar ambivalence that marks Dalit politics and discourse

today. On the one hand, it invests tremendous faith in modernity because it is really

with its onset that possibilities of Dalit emancipation opened up in significant ways;

on the other, it exhibits a strong aversion to the dominant, secular-nationalist

discourse of modernity in India that it sees as irrevocably 'upper-caste' and the root of

the re-institution of upper- caste power over modern institutions.

his ambivalence is visible not only in the field of cultural politics, as it were, but

equally in the field of politics as such. In this field, the dynamic is somewhat Tdifferent but what makes it possible for the Dalit political formations like the Bahujan

Samaj Party (BSP), to chart out a course that radically questions the common sense of

the secular modern, is its deep distrust of the old nationalist and secular elite. A case

in point is the relationship of BSP and much of the Dalit intelligentsia, with the

emerging secular political formations, especially in North India. It is well-known that

here, in the state of Uttar Pradesh, the Bahujan Samaj Party , has repeatedly gone into

an alliance with the main party of the Hindu Right, the Bharatiya Janata Party (BJP).

It has formed governments along with the BJP, not only in 1993 and 1997 but also in

2002, in the year of the Gujarat massacres of the Muslims. In this period, when the

BJP and its partner organisations of the Sangh family have bared their fascist fangs,

leaving nobody in any doubt about their intentions, the BSP entered into an alliance


151 152

occasion, the BJP displayed considerable sagacity by agreeing to play a subordinate

role in the alliance.

fter the recent collapse of the BSP-BJP alliance for the third time, reports coming Ain from UP nevertheless, indicate that insofar as the Dalit masses of UP are

concerned, the experiments have been fruitful in restoring a sense of dignity among

them. On the other hand, the upper caste supporters of the BJP, the Rajputs in

particular, feel slighted by the way in which lower orders have taken to

insubordination and challenged their position during these successive tenures of the

alliance. The experiment, whatever its long-term implications for the secular front,

reveals the immense complexity that marks the new era of 'caste politics' in India.

(Aditya Nigam is Fellow at the Centre for the Study of Developing Societies (CSDS),

New Delhi).

End Notes1. The term 'Nehruvian era' is being used here to refer to an era that actually extends far

beyond the person of Jawaharlal Nehru himself almost up to the beginning of the 1980s,

when the terms of political discourse and practice were still articulated within a secular-

nationalist framework that was put in place by the Nehruvian leadership.2. For further details, see Satish Deshpande, Contemporary India: A Sociological View,

(Penguin India, 2002).3. See Lok Sabha Debates, Sixth Series, Vol. XXII, No. I, Lok Sabha Secretariat, Feb. 23, 1978,

Pp. 340-34. Christophe Jaffrelot, India's Silent Revolution: The Rise of the low Castes in North Indian

Politics, (Delhi: Permanent Black, 2003) See especially the discussion on pages 222-228.5. The term 'Dalitbahujan' is a recent coinage that refers to the broad spectrum of lower caste

groups ranging from the untouchable castes, that is Dalits, to the other lower castes

generally referred to as Shudras in the language of the chaturvarna system.


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of the Babri Masjid, it was these two leaders who had displayed the most determined

opposition to the BJP. Mulayam Singh, in fact, used the entire force of the state

machinery during his chief ministership, to prevent the 'kar sevaks' from demolishing

the structure of the masjid in November 1990. It was during this same period when

L.K. Advani's Rath Yatra entered Bihar, en route to Ayodhya, that Laloo Yadav

displayed exemplary courage in arresting Advani, leading to the eventual downfall of

the VP Singh government of which Laloo was a part. It was in this context that the

anti-communal secular front came into existence and the OBC parties naturally

acquired a crucial position within it, given their stance. This is where the problems

began as far as the BSP and the newly assertive Dalits were concerned. To throw their

lot with the secular front unconditionally was to tie their own hands and throw

themselves to the wolves. For the conflict with the OBCs in the countryside was now

playing itself out in its most aggressive form. The choice was a difficult one and it was

aggravated by another circumstance: the BJP, suave and sophisticated, with the self

confidence of the classes who have traditionally wielded power, showed a

preparedness to play second fiddle to the BSP in a joint government. This was

something that the OBC parties and Mulayam Singh Yadav just could not do- they

were novices in the game of power as were the Dalit groups. It is quite possible that if

Mulayam had made the magnanimous gesture that the BJP repeatedly made, the BSP

might still have opted to remain in the secular alliance.

his is where the deep distrust of the common sense of the secular-nationalist, so Tingrained in Dalit politics, comes into play. For the BSP did not really have a

moment's hesitation in joining forces with the BJP in forming a government and, in a

sense, it was to open the floodgates for later realignments where parties like the

Telegu Desam Party and the AIADMK and DMK were to enter into alliances with the

BJP, in order to form the government at the Centre. Not only did it form governments

with the BJP, the BSP in its last round of power-sharing even bent over backwards to

help the BJP leaders in the Babri Masjid demolition case. The point here is not simply

that the BSP went into a power-sharing alliance with the BJP, for there are enough

precedents of many other parties and groups doing the same in different ways, at

different times. Even the Left is not entirely free of that taint. In that sense, political

opportunism has always been part and parcel of electoral politics in India. The point

here is that it entered into this alliance with a clear argument against the

dichotomised mode of politics where the 'communalism versus secularism' conflict

was presented by the secular front as simple common sense, as if it subsumed all

other conflicts and exhausted all other problems. This manner of privileging the

'secular versus communal' conflict in a manner of speaking, presented the secular

front as non-negotiable: you had to enter the front only on the terms already set by it.

There was no possibility of any negotiation here, especially with regard to the

backward caste parties. It is here that despite its history of attempting to build an

anti-upper-caste-Hindu alliance, and despite the fact that it sees its project as

irreconcilable with the Hindutva project, the BSP displayed its refusal to take any

proposition as given and non-negotiable. The sole concern that guided it was whether

its move would help its own project of Dalit liberation. As mentioned earlier, on this


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04 - South Asian Economic Blues

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