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HUMANDEVELOPMENTIN SOUTH ASIA2001

Globalisation and HumanDevelopment

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The Mahbub ul Haq Human Development Centre

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ABBREVIATIONS

AIDS acquired immune deficiency syndrome

ANZCERTA Australia New Zealand Closer

Economic Relations Trade Agreement

APEC Asia-Pacific Economic Cooperation

ASEAN Association of South-East Asian Nations

BIMSTEC Bangladesh, India, Myanmar, Sri Lanka,

Thailand Economic Cooperation

BWI Bretton Woods Institutions

CDR credit deposit ratio

CD-ROM compact disk with read-only memory

ECO Economic Cooperation Organisation

EEC European Economic Community

EPZ export processing zone

ESAF Enhanced Structural Adjustment Facility

EU European Union

FDI foreign direct investment

FTA free trade agreement

FTAA Free Trade Association of the Americas

G-8 Group of Industrialised Countries

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GEP Group of Eminent Persons

GNP Gross National Product

ICT information and communication technology

IDA International Development Association

IDS infrastructure development surcharge

IGG Inter-Governmental Group

IMF International Monetary Fund

IOR-ARC Indian Ocean Rim Association for

Regional Cooperation

IPA intergrated programme of action

IPR intellectual property rights

IT information technology

MERCOUSOR Southern Cone Common Market

(Argentina, Brazil, Paraguay, Uruguay)

MFA Multi-Fibre Arrangement

MFN most favoured nation

MNCs Multinational Corporations

NAFTA North American Free Trade Area

NTBs non-tariff barriers

NGO non governmental organisation

ODA official development assistance

OECD Organisation for Economic Cooperation

and Development

PPP purchasing power parity

PRGF Poverty Reduction and Growth Facility

PRSP Poverty Reduction Strategy Paper

PPM process and production methods

R&D research and development

RTAs regional trading arrangements

SAARC South Asian Association for Regional

Cooperation

SADF South Asia Development Fund

SAP structural adjustment program

SAPTA SAARC Preferential Trading Arrangement

SARC South Asian Regional Cooperation

SBW special bonded warehouse

SDT special and differential treatment

TRIMS Trade Related Investment Measures

TRIPS Trade Related Intellectual Property Rights

UN United Nations

UNICEF United Nations Children Fund

UNDP United Nations Development Programme

US United States of America

VAT value added tax

WTO World Trade Organization

Foreword v

In May 1998 at a brain-storming session ofthe UNDP, Mahbub ul Haq presentedsome ‘random thoughts’ on globalisation.His arguments were that globalisation wasan irreversible force, and that developingcountries must learn to manage it in theirbest interests or they would get drownedby its cross currents. He argued that to gainfrom globalisation developing countriesmust accelerate their human development,improve governance, and invest ininfrastructure. If globalisation wassuperimposed on a poorly-educated andpoorly-trained labour force with poorsystems of governance and infrastructure,it would not lead to growth nor reducepoverty. Globalisation also had to be bettermanaged by the institutions of globalgovernance if these institutions were toachieve their professed goals of sustainabledevelopment and poverty reduction indeveloping countries. These ideas ofMahbub ul Haq guided the analysis of thisyear’s report.

Our purpose in this report has been toassess the nature and process ofglobalisation on economic growth andhuman development in South Asia. Ourefforts, however, have been somewhatlimited by the lack of availability of up todate data. The most current data availableis only up to 1999. The speed with whichthe globalisation process is moving, two tothree years’ gap is a significant one.

The report analyses the experience ofthe South Asian region with globalisation.Although some countries had opened uptheir economies before the 1980s, by theearly 1990s all the countries in South Asiaentered the globalisation process byliberalising their economies, opening uptheir markets, and implementing reformsto improve economic management. Theresults of these efforts have been unevenfrom one country to another and within

Foreword

each country. Even where economicgrowth rate has gone up, human welfare interms of education, health or employmentmay not have improved. The reportassesses this process from the point of viewof its impact on people.

The report presents the experience offive South Asian countries, India,Bangladesh, Pakistan, Nepal and Sri Lanka.The questions this report raises and tries toanswer are: What has been the extent ofSouth Asia’s trade and financial integrationwith the world? How have the economicreform programmes fared in raising growthand improving human development? Whathas been the social impact of theglobalisation process? Do South Asiannations have full access to the opportunitiesof expanded trade? Are free markets opento South Asia’s poor and the unskilled?

The report contains seven chapters, inaddition to the Overview. Chapter oneintroduces the theme of this year’s reportby presenting a conceptual framework foranalysing globalisation and humandevelopment. Chapter two looks at theexperience of South Asia’s integration withthe world’s trade and investment. Chapterthree focuses on the social impact ofglobalisation. Chapter four presents fivecountry case studies on the economicreform programmes and their impact ongrowth and human development. Chapterfive argues a case for increased regionalcooperation. Chapter six revives some ofMahbub ul Haq’s views about the need forreforms of the institutions of globalgovernance. And finally, in chapter seven,the report proposes an agenda thatidentifies the most pressing policy andinstitutional changes required to achievehumane globalisation in South Asia.

The report has benefitted tremendouslyfrom the comments and suggestions ofGustav Ranis, Frances Stewart and Paul

vi Human Development in South Asia 2001

Streeten. Devaki Jain was very helpful indeveloping the initial ideas for theconceptual chapter. Also Devaki Jain, withSeeta Prabhu and Sandhya Iyer, prepared abackground paper on social impact ofglobalisation in South Asia. I thank themfor their commitment to this Centre. I amgrateful to Jayati Ghosh for writing anexcellent case study of India’s globalisationexperience. The section on India in chapter4 is an abridged version of the paperprepared by Ghosh. I am also grateful toHenning Karcher, UNDP Representativein Nepal, to share with us a paper by A. R.Khan on ‘Globalisation and HumanDevelopment in Nepal.’ Our reportbenefitted from the analysis presented inthat paper.

Words fail me when I try toacknowledge the contribution of CIDA forits consistent support of the Centre. CIDAhas been on the forefront in supportingand advocating for the cause of socialjustice in South Asia as well as in otherdeveloping regions. A special thanks to theCanadian High Commissioner to Pakistan,H. E. Ferry de Kerckhove for the manyways he tried to help the Centre and itsmission. As always, the report has benefitedfrom the help extended to us by the fieldoffices of UNDP in South Asia, particularly

Onder Yucer, Brenda McSweeney andHenning Karcher, UNDP Representativesin Pakistan, India and Nepal. I am eternallygrateful to Nazir Ladhani, Chief ExecutiveOfficer of the Aga Khan FoundationCanada, for providing the best support theCentre needed—two dedicated pro-fessionals from Canada to work with us inthe preparation of the report. This in-kindcontribution is much appreciated.

The research team at the Centreworked hard and for long hours tocomplete this report. I must recognise, inparticular, Sarfraz Qureshi for providingsupport at each stage of the preparationof the report. The research team,consisting of Shazra Azhar, Umer Khalid,Wasay Majid, Farooq Malik, Faisal HaqShaheen, Lubna Shahnaz, ShabnamShallwani, Michael Wang and HyderYusafzai collected and compiled data andprepared tables and charts, besidespreparing background notes. All this workformed the real foundation of the report.Aasim Sajjad Akhtar was very helpful inproviding editorial assistance at the finalstage of the preparation of the report. Ialso thank Taha Mustafa for composingand designing the report, and Malia Asimfor handling the administrative details.

IslamabadJuly 31, 2001 Khadija Haq

Team for the preparation of the 2001 ReportTeam leader: Khadija Haq

HDC Research TeamSarfraz Qureshi (Director)Shazra AzharUmer KhalidWasay MajidFarooq J. MalikFaisal Haq ShaheenLubna ShahnazShabnam ShallwaniMichael WangHyder Yusafzai

Panel of ConsultantsJayati GhoshDevaki JainGustav RanisFrances StewartPaul Streeten

With the assistance ofMalia Asim

Taha Mustafa

Foreword vii

The preparation of this report owes agreat deal to many individuals andorganisations. The financial support forthe report was provided by the CanadianInternational Development Agency(CIDA), Norwegian Agency forInternational Development (NORAD),and Aga Khan Foundation-Canada.Without the steady support of CIDA andNORAD for the production of thisannual report for the past five years, itwould have been impossible to sustainthis important work. We are also gratefulto the field offices of UNDP in variousSouth Asian countries for their invaluablehelp in organising the launch of thereport. All these financial, technical andmoral support are gratefullyacknowledged.

Several national, regional andinternational institutions shared theirresearch materials and data with theMHHDC team. The report benefited fromthe data provided by the UNESCOPakistan country office, InternationalLabour Office, United Nations Children’sFund, United Nations DevelopmentProgramme, United Nations InformationCentre and The World Bank. We aregrateful to the following Pakistani

Acknowledgements

institutions: Federal Bureau of Statistics andPakistan Institute of DevelopmentEconomics (PIDE). The kind assistanceprovided by the librarians of the WorldBank (Pakistan), UNDP (Pakistan), ILO(Pakistan), Institute of Regional Studies andPIDE are also acknowledged.

We would like to thank the followingindividuals and institutions for respondingto our researchers’ various queries andproviding materials: H. E. the HighCommissioner of Bangladesh, the HighCommission of Sri Lanka, the RoyalNepalese Embassy, Nadeem ul Haque(IMF-Sri Lanka), Sadiq Ahmed (WorldBank), Eric Falt (UNIC-Pakistan), SohailJahangir Malik (World Bank-Washington),Anwar Shah (World Bank-Washington),Aasim Sajjad Akhtar and Shiva Sharma(National Labour Academy, Kathmandu).

We are always thankful to the OxfordUniversity Press, Pakistan for theprofessional manner in which they handlethe publication of our reports. We wishto thank particularly Ameena Saiyid forher own special commitment to thisproject. We would also like to place onrecord our thanks to Rana GhulamShabbir and Riaz Tahir for providinglogistical support to the Centre.

viii Human Development in South Asia 2001

About the Mahbub ul Haq Human Development Centre

Mahbub ul Haq Human Development Centre was set up in November 1995 in Islamabad, Pakistan by the late Dr.Mahbub ul Haq, founder and chief architect of UNDP Human Development Reports. With a special focus on SouthAsia, the Centre is a policy research institute and think tank, committed to the promotion of the human developmentparadigm as a powerful tool for informing people-centered development policy nationally and regionally, in order toreduce human deprivation.

The Centre organises professional research, policy studies and seminars on issues of economic and social developmentas they affect people’s well being. Believing in the shared histories of the people of this region and in their shareddestinies, Dr. Haq was convinced of the need for cooperation among the seven countries of the region. His visionextended to a comparative analysis of the region with the outside world, providing a yardstick for the progress achievedby South Asia in terms of socio-economic development. The Centre’s research work is presented annually through areport titled, Human Development in South Asia.

Continuing Mahbub ul Haq’s legacy, the Centre provides a unique perspective in three ways: first, by analysing theprocess of human development, the analytical work of the Centre puts people at the centre of economic, political andsocial policies; second, the South Asia regional focus of the Centre enables a rich examination of issues of regionalimportance; and third, the Centre’s comparative analysis provides a yardstick for the progress and setbacks of SouthAsia vis-à-vis the rest of the world.

The current activities of the Centre include: preparation of annual reports on Human Development in South Asia;preparation of policy papers and research reports on poverty reduction strategies; organisation of seminars andconferences on global and regional human development issues, South Asian cooperation, peace in the region andwomen’s empowerment; and publication of a semi-annual journal, Mahbub ul Haq Human Development Review. TheCentre also organises an annual Mahbub ul Haq Memorial Seminar and a Mahbub ul Haq Lecture.

President Board of AdvisorsKhadija Haq Sartaj Aziz

Fateh ChaudhriDirector of Research Meghnad DesaiSarfraz Qureshi Parvez Hasan

Enrique IglesiasBoard of Governors Attiya InayatullahShahid Javed Burki Javed JabbarSahabzada Yaqub Khan Devaki JainAmir Mohammad Lal JayawardenaMoeen Qureshi A. R. KemalNafis Sadik Gustav RanisQaiser Ahmad Shaikh Wasim Sajjad

Frances StewartPaul StreetenMaurice Strong

Mahbub ul Haq Human Development Centre42 Embassy Road, G-6/3, Islamabad, Pakistan.

Tel: 92-51-2271228. Fax: 92-51-2822794.e-mail: [email protected] website: www.un.org.pk/hdc

Contents ix

Contents

Overview 1

Chapter 1Globalisation and Human Development: A conceptual framework 10What is globalisation? 10Nature and character of the globalisation process 11Challenging globalisation 14Globalisation and South Asia 15Rethinking globalisation 16

Chapter 2Trade and Financial Globalisation of South Asia 22Trade integration 22Financial integration 27Economic performance during globalisation 32

Chapter 3Social Impact of Globalisation in South Asia 46Globalisation in South Asia 46Social development policies in South Asia 55Poverty alleviation programmes 56Social protection programmes 58Conclusions 58

Chapter 4Economic Reforms and Globalisation: Country case studies 62Introduction 62India 63Pakistan 74Bangladesh 83Nepal 89Sri Lanka 95Conclusions 101

Chapter 5South Asia and Regional Cooperation 106Regional trading groups 106South Asia’s trade outside the region 108Trade: SAARC vs. other regional blocs 109SAARC and economic cooperation 110Pros and cons of preferential arrangements 112Some policy issues for SAPTA 113Benefits of regional cooperation 114Policy implications 116

x Human Development in South Asia 2001

Chapter 6Institutions of Global Governance and Globalisation 120Bretton Woods Institutions: A brief history 120Recent policies of IMF and World Bank in South Asia 122IMF in Latin America, East Asia and Russia 125IMF in South Asia 126World Trade Organization 127

Chapter 7Towards Humane Globalisation 134National imperatives 134Global imperatives 138Role of civil society and private sector 139

References 143Bibliographic Note 143

Statistical Profile of Globalisation in South Asia 151Human Development Indicators for South Asia 159Key to Indicators 179

Boxes1.1 Views on globalisation 111.2 Teleworking: India’s new growth sector 141.3 Gainers and losers of globalisation 153.1 Globalisation and the children 503.2 Globalisation and the women 535.1 Will progress within EU and NAFTA affect SAARC? 1085.2 SAARC: A calendar of events 1115.3 SAPTA principles in a nutshell 1125.4 Regional trading blocs and South Asia 1166.1 Are the new Poverty Reduction Papers really new? 1246.2 Clothing and Textiles 1287.1 Globalisation: Lessons South Asia could learn from the East Asian crisis 141

Tables2.1 Mean unweighted tariff rates 232.2 Share of high technology exports in manufactured exports 252.3 Percentage of total exports accounted for by top three products 262.4 GDP growth 33A2.1 Trade to GDP ratios 34A2.2 Exports of goods and services, percentage of GDP 34A2.3 Exports of goods and services, annual percentage growth 35A2.4 Real effective exchange rates 35A2.5 Share of world’s exports 35A2.6 Structure of merchandise exports 36A2.7 Service exports 36A2.8 Average workers’ remittances per year 37A2.9 Direction of exports 37A2.10 Intra-regional trade 38A2.11 Bilateral export flows among South Asian countries 38A2.12 Bilateral import flows among South Asian countries 39A2.13 Trade balance 39A2.14 Average export and import growth 40A2.15 Current account balance 40

Contents xi

A2.16 Stock market indicators 41A2.17 Aggregate net long-term resource flows-South Asia 41A2.18 Foreign direct investment 42A2.19 Top ten industries in India receiving FDI approval between August 1991 and

June 1995 42A2.20 Portfolio equity flows 433.1 Nature of poverty in selected South Asian countries 493.2 Percentage share of real per capita GDP in South Asia 493.3 Profile of education in South Asia 513.4 Educational attainments of the employed 534.1 Growth of agricultural output 684.2 Industrial growth rates per annum 694.3 Annual rates of growth of the Index of Industrial Production 704.4 Key indicators of the balance of payments 714.5 Capital inflows 714.6 Some fiscal magnitudes as ratios of GDP 734.7 Estimates of rural head count poverty ratios 734.8 Work participation rates for rural men and women 744.9 Indicators of trade liberalisation 774.10 Average annual growth rates 804.11 Agricultural growth by crops 814.12 Industrial sector growth 814.13 Fiscal imbalances 814.14 Key balance of payments indicators 824.15 Trends in poverty by rural and urban areas 824.16 Indices of daily real wages in informal sector 834.17 Household income distribution by region 834.18 Sectoral growth rates of GDP 874.19 Fiscal and monetary variables 894.20 Incidence of poverty in Bangladesh 894.21 Gini Index 894.22 Average annual growth rates 934.23 Trends of macro-economic indicators 944.24 Growth rate of GDP 994.25 Growth rates of GDP and sectors during 1990s 994.26 Macro-economic indicators 1004.27 Functional classification of capital expenditure 1005.1 Direction of exports 1085.2 Exports within the regional trade blocs 1095.3 Total exports by regional trade blocs 109

Figures2.1 Improving trade to GDP ratios 232.2 Share of clothing and textiles in total exports 242.3 Institutional Investors credit ratings 282.4 Private capital to developing countries 292.5 South Asia’s share of FDI to developing countries 292.6 Distribution of FDI in South Asia 302.7 FDI and portfolio equity investment to South Asia 303.1 Life expectancy in South Asia 473.2 Adult literacy in South Asia 483.3 Population below income of $ 1 per day in South Asia 483.4 Maternal mortality rate 52

xii Human Development in South Asia 2001

3.5 Public education expenditure 543.6 Proportion of health expenditure in GDP in South Asia 554.1 Annual growth of GDP and sectors 804.2 Mean unweighted tariff rates 854.3 Sectoral growth rates 884.4 Sectoral growth rate and GDP 935.1 Members of GATT/ WTO 1065.2 The number of RTAs notified to GATT/ WTO each decade 1076.1a Net financial flows from multilateral institutions as a percentage of

FDI flows 1216.1b Net financial flows from multilateral institutions as a percentage of FDI flows

to South Asia 1216.2 Top 200 global corporations 1216.3 Cumulative inflows of IDA in South Asia 123

Overview 1

Overview

Globalisation is no longer anoption, it is a fact. Developingcountries have either to learn tomanage it far more skillfully, orsimply drown in the global crosscurrents.

– Mahbub ul Haq

2 Human Development in South Asia 2001

During theglobalisation phaseabout half a billionpeople in South Asiahave experienced adecline in theirincomes

Overview

Globalisation, through movement ofgoods, services, people and informationacross national boundaries, has resultedin the opening up of economies andsocieties. The nature and speed of thisprocess have been facilitated andaccelerated by new developments in theinformation and communicationtechnology. International financialmarkets, through short and long termcapital flows, and trans-border productionnetworks have been driving the globalintegration of economies.

The central thesis of the 2001 Reporton Human Development in South Asia is thatglobalisation, though an inevitableprocess and an imperative for nations toparticipate in this process in order todraw its potential benefits, is by no meanswithout its risks. It requires manyenlightened policies on the part ofnational governments, internationalorganisations, private sector and civilsociety to translate the benefits ofeconomic growth that result fromglobalisation into enriching lives ofordinary people.

The report comes up with severalmessages:

The first message is that during theglobalisation phase about half a billionpeople in South Asia have experienced adecline in their incomes. The benefits ofeconomic growth that did take place werelimited to a small minority of educatedurban population. In South Asia, incomeinequality has increased. It is argued thatat the initial stage of opening up theeconomies to a competitive globalmarket, income inequality will rise, buteventually everyone will gain. Withcontinuing reforms, productivity andefficiency will rise and the country’sshares in global trade, finance and serviceswill increase. But who bears the burden

of short-term costs? The record so farshows that it is the poor who bear theheaviest burden, and they are the oneswho do not have any means to supportthemselves in bad times.

The second central message, whichfollows from the first, is that economicgrowth and human development mustmove together, otherwise neithergrowth nor human development can besustained. This requires much moreinvestment in human development,particularly universal quality basiceducation as well as higher levels ofeducation and skill training to enablethe countries to compete in the globalmarketplace. In order for economicgrowth to be job-led, focus should beon labour-intensive as well asknowledge-intensive patterns ofproduction.

The third message is that South Asiamust reinvigorate its regional economiccooperation mechanisms already in place(SAARC and SAFTA) to enhance theregion’s ability to gain from regional aswell as global trade, and to improve thenegotiating capability of South Asia inglobal forums.

Globalisation, in the ultimate analysis,is to be seen as only a means to enhancepeople’s wellbeing. All policies andprogrammes must focus on people. So,first, we need to understand the processthat is at work here in South Asia as wellas around the world. Secondly, we needto assess globalisation from the point ofview of human development and povertyreduction. The mission of this Centre isto approach every issue from theperspective of the people. Howglobalisation is impacting on the majorityof people? How are they participating andbenefiting from globalisation? And, hownational and global institutions of

Overview 3

Provision of socialsafety nets has beenweakened in theregion

governance are responding to the needsand concerns of people? These are thequestions that we raise and try to answerin this report.

The globalisation process in SouthAsia has focussed on integratingmarkets without improving thecondition of the vast majority of SouthAsians.

To understand the globalisation process andits outcome, one needs to deconstructglobalisation. Not all the components orflows of globalisation are moving in thesame direction. While capital moves freely,and information and communication aregetting freer, labour movement, mostly theunskilled, is restricted, and trade is not fullyliberalised, especially of goods of particularinterest to developing countries. Thebalance sheet of gainers and losers in theglobalisation process shows the unevenburden borne by the poor within andamong nations.

During the globalisation period,income inequalities have widened inSouth Asia. The number of people inpoverty has increased. The levels ofhuman development, though improvedsince 1960s, have started to stagnate oreven decline. The poor are beingmarginalised.

The opening up of markets hassuddenly thrown the domestic industriesto face a highly competitive world,resulting in the closure of manyindustries. On the other hand, tradebarriers erected by the developedcountries have hampered the growth ofexports of labour-intensive goods fromSouth Asia. The skilled labour, especiallyworkers in the information/communication technology sector, hasbeen the main beneficiaries ofglobalisation in this region. The provisionof social safety nets has also beenweakened in the region, as thegovernments’ ability to help the victimsof globalisation has been eroded.

South Asia’s integration with the tradeand capital markets have expandedconsiderably, yet South Asia remainsamong the least-integrated regions inthe world.

By the end of the 1990s, average tariffrates fell rapidly in all countries, with theregional average falling to 20 per cent. InBangladesh, the average tariff fell from114 per cent to 22 per cent, and in India,from 82 per cent to 32 per cent. YetSouth Asia’s average tariff rates remainedmuch higher than, for example, Korea orMalaysia where the average tariff rate was9 per cent or less.

Depreciation of real exchange rates,among many other export promotionmeasures, led to export growth rate ofabout 10 per cent per annum duringthe 1990s. Exports structures have alsochanged from primary commoditiestowards more manufactured goods andservices. Within manufactures, labour-intensive goods, such as garments andtextiles, jewellery and leather goodsdominated manufactured trade. Exportsremain concentrated in a limitednumber of products such as clothingand textiles, and destinations such asUnited States and European Union.Nepal’s export is concentrated in onlyone product, carpets. India is the onecountry in South Asia with the fastestgrowing share of high technologyexports.

South Asia has also become morefinancially integrated over the pastdecade. Aggregate net resource flowsto the region have expanded rapidlyduring the 1990s, however most ofthese flows are composed of foreigndirect and portfolio investments.Despite this increase, South Asia’sshare of total private capital todeveloping countries has declined overthe past decade, falling from 7 per centduring the 1980s to 3 per cent in the1990s.

From the record to date, it is unclearwhether greater integration with the


Most South Asiancountries failed tomaintain a balancebetween economicand socialdevelopment policies

world economy has benefited economicgrowth in South Asia. Comparing theaverage regional GDP growth ratesbetween pre- and post-globalisationperiods, it seems that growth has in factbeen lower during the 1990s, despiteIndia’s high growth rates. It appearsthat greater economic integration hasyet to translate into sustained growthfor the majority of South Asiancountries.

Globalisation has not been accom-panied by reduction of poverty orimprovement in human development.

Prior to globalisation, South Asia hadexperienced high population growth rates,high levels of illiteracy, poor healthattainments, pervasive poverty andinequitable distribution of income andassets. These initial conditions did notimprove much during globalisation as theSouth Asian average growth rate, which was5.8 per cent during 1980-89 fell to 5.4 percent during 1990-98. Also, during theglobalisation phase, there were no adequatepolicies and funding in the social andeconomic development fields to reducepoverty or to make any meaningfuldifference in the lives of the majority ofthe population.• South Asia, home of the largestnumber of poor people in the world (515million) did not make much progresstowards poverty reduction. While theincidence of poverty declined both interms of depth and severity, disparitiesbetween rural and urban areas persisted.The income distribution across thevarious economic groups worsenedduring globalisation.• On the educational front, South Asiadidn’t fare very well either. Over 40 percent of children did not reach grade 5 inthe 1990s. Sharp gender disparities wereobserved in the mean years of schoolingbetween male and female students. Withglobalisation, the demand for highly

skilled and specialised labour forceincreased. However, none of thecountries mobilised or providedadditional resources to the tertiaryeducation sector.• Health expenditures were reduced tolevels that were lower than those in thepre-globalisation period. Over one fifthof population in the region did not haveaccess to health care services. Theglobalisation period was thuscharacterised by declining provisioning ofpublic health facilities, and decliningpopulation to health personnel ratio. Theregion also experienced increasing casesof infectious diseases like TB, malaria andthe emergence of HIV/AIDS, which putfurther strain on the health care systemsin the region.• All South Asian countries have beenimplementing several poverty alleviationprogrammes over the past decades,financed mainly by the state. With theonset of globalisation, the resourceallocations to these programmes havebeen declining, reducing theireffectiveness. The social securityprovisions, available to the workingpopulation, also decreased with changingemployment structures, as more peoplewere pushed into the informal sector.

Most South Asian countries failed tomaintain a balance between economic andsocial development policies duringglobalisation. An equitable globalisationprocess requires the integration of thefinancial, trade and investment policieswith those of social development. Thestabilisation and structural adjustmentprogrammes of the IMF and the WorldBank, and the new trading regime of theWTO, have led to fiscal compression,tariff reductions and cutbacks of publicprovisioning of social services. The socialservices expenditures in the post-globalisation period remained stagnant atthe prevailing pre-reform levels, reducingthe coverage and effectiveness of servicedelivery.

Overview 5

Liberalisationpolicies have yet tolead to efficientallocation ofresources

world; facilitates political harmony withinthe group; and forges a collectivebargaining position in global negotiations.Yet in 1999, trade among the South Asiancountries was less than 5 per cent of theregion’s total exports, compared to 22 percent in ASEAN and 55 per cent inNAFTA.

In South Asia there are enougheconomic reasons for promoting intra-regional trade and cooperation. Directtrade in goods that are being divertedthrough third countries will benefit allcountries. Besides, many goods beingimported at higher costs from outside theregion can be made available from withinthe region.

If South Asian countries remain aloofin a world of trading blocs, they stand tolose. In a world that is headed towardsfree trade, regional agreements wouldfacilitate the entry of smaller nations inthe multilateral trading system on apreferential basis. It is important forSouth Asia to acknowledge the welfaregains from their own regionalarrangements which would at the sametime prepare the domestic producers forthe rigours of multilateralism.

A global economy has emerged, butthe institutions of global governanceare not performing either efficiently orequitably.

The Bretton Woods Institutions (IMF,World Bank, GATT/WTO) were createdto serve as global institutions formaintaining financial stability and forpromoting development and trade. Butthe impact of policy conditions of theseinstitutions falls disproportionately on thepoor.

While the early policies of theseinstitutions were designed in the spirit ofbuilding the capacity of the state, overtime there has been a trend towardsreducing the role of the state and movingtowards liberalisation and privatisation.The IMF loans are useful as a certificateof creditworthiness for accessing other

Economic reform programmes havefailed to increase growth substantiallyor achieve macroeconomic balance.

In Bangladesh and Nepal, the growthrates during globalisation have beenmodest and in Sri Lanka the growthrate has faltered during the second-halfof the 1990s. In Pakistan, growth hasdeclined. Only India has been able toachieve a growth rate of above 6 percent.

The sequencing of reform measures,such as reducing tariffs before expandingtax base and improving collection, orcurtailing government borrowings fromthe banking system before restructuringthe public sector expenditure, was notwell-tailored to achieve the desired results.

Agriculture has performed badly duringglobalisation. Not enough policy focus wasgiven to this sector either to protect it fromthe vagaries of the market or to make itmore competitive to face globalisation.

Trade and current account balanceshave remained negative in all countriesduring the 1990s. India’s position hasbeen relatively better, and Nepal’s worse.Despite increased inflow of FDI to Indiaand Sri Lanka, South Asia has not been apreferred region for attracting FDI.

Employment expansion in none of thecountries has been significant. Weakemployment creation, low growth andlow allocation to social sectors explainSouth Asia’s slow progress in povertyreduction and human development duringthe globalisation period.

There is a worldwide movement forforming regional trading blocs, yetintra-regional trade within South Asiais very low compared to such trade inother regional groupings.

There are many advantages for formingregional trading blocs: it promoteseconomic cooperation among themembers; improves the competitiveposition of the group in a globalised


Reforms mustcontinue but with ahuman face

multilateral and bilateral loans and grants,but the conditions attached to these loansmake it impossible for countries to getout of debt trap.

It is true that the decisions regardingthe budgetary allocations for socialdevelopment are made by nationalgovernments. However, in view ofdiminished revenue and increased costsof debt servicing, the governments inSouth Asia are finding it increasinglydifficult to allocate adequate resources forsocial sector programmes.

Since the late 1980s, poor economicmanagement of the public sector led boththe IMF and World Bank to shift theirfocus from state-led development effortstowards market and private sector-leddevelopment. But the liberalisation policieshave yet to lead to efficient allocation ofresources, higher growth rates and reduceddeficits. Most developing regions, includingSouth Asia, have been running highercurrent account deficits without achievinghigher growth rates. This is primarily dueto widening trade deficits as exports arenot expanding as much as imports.

It is generally feared that the structuraladjustment programmes of subsidyelimination, removal of trade restrictionson agricultural commodities, and anoverall unification of local with globalprices will leave the poor farmers in SouthAsia most vulnerable.

As tariff barriers have fallen indeveloping countries, the world has beenfurther divided along income lines,separating the global rich from the globalpoor. While developing countries havereduced their tariffs to levels lower thanwhat was required by the WTO agreement,developed countries have not delivered thepromised tariff reductions on goods of keyinterest to poor countries.

Agriculture in most developed countriesis sheltered behind high tariff walls, farmsubsidies, loan guarantees and non-tariffbarriers. Developing countries that areheavily dependent on agricultural exportsare at a great disadvantage in terms ofcompeting against the heavily-subsidisedagricultural products of the North.

From the human developmentperspective, institutional policies ofmultilateral organisations have resulted inincreased deprivation of the poor , risingunemployment and unsustainabledevelopment practices.

Positive effects of globalisation oneconomic growth and humandevelopment depend on how theprocess is managed nationally andinternationally.

At the national level, South Asiancountries need to make sustained effortsin four policy areas: accelerate humandevelopment, especially education; reducepoverty; improve economic management;and enhance regional and globalintegration.• South Asia must prepare its labourforce to face global competition. Centralto this is the strategy to provide qualityprimary education to all school-agechildren, provide them appropriate skill-training as well as higher levels ofeducation in new technological fields.While governments should allocatesufficient resources for primary andsecondary education, private sectorshould be mobilised to set up technicalinstitutions for imparting training forhigher levels.• Poverty reduction strategies must bebuilt into the micro and macro policies.Globalisation policies to focus on cashcrops instead of food crops, and capital-intensive rather than labour-intensiveindustries need to be analysed to assesstheir impact on the poor.• Economic management in all countriesneeds to be improved. Reforms mustcontinue but with a human face. Thefocus should be on improvingmanagement of resources, reducingcorruption, taxing the rich, cutting thenon-merit subsidies, and establishing theinstitutions to implement and monitorreforms. All globalisation policies andstrategies must be judged by oneyardstick: how are they impacting on

Overview 7

people, on poverty reduction, on jobcreation, on children and on women.• Integration with the global economicsystem should be enhanced. But SouthAsia needs to continue in more traditionallabour-intensive low-technology exports,as well as diversify into more hightechnology goods and services. India’ssuccess in establishing a niche for itselfin the fast-growing global software andinformation technology marketdemonstrates that such diversification canbe achieved.

At the global level, a time may havecome to revisit some of the excellentideas for reforming the institutions ofglobal governance. This report has listedonly three: World Central Bank,Economic Security Council, and theTobin Tax. The developing countriesbadly need today a lender of last resort atthe global level to rescue them fromshort-term liquidity crisis, without turningit into a long-term development crisis.There is also a need to establish an

Economic Security Council at the UnitedNations to address the economic andhuman security aspects that threaten theglobal community, just as the UN SecurityCouncil looks at the political and militaryaspects. Also, in view of the recentvolatility of financial markets exacerbatingpoverty and human crisis, the Tobin Taxproposal to tax speculative movementsof short-term capital needs to beconsidered seriously by the globalcommunity.

The roles of civil society in guardingthe poor against the disproportionateburden placed on them, and the privatesector in playing a supportive andcompassionate role in humanisingglobalisation are essential. Governmentsalone cannot monitor everything anddeliver all the services. But globalisationprocess requires an activist governmentto protect the vast majority of SouthAsians, with the help and active supportof the civil society and private sector.

Globalisation and Human Development: A Conceptual Framework 9

1Globalisation and Human

Development: A ConceptualFramework

We approach every issue from thevantage point of people. Do theyparticipate in economic growth aswell as benefit from it? Do theyhave full access to the opportunitiesof expanded trade? Are their choicesenlarged or narrowed by newtechnologies? Is economicexpansion leading to job-led growthor job-less growth? Are free marketsopen to all people?

– Mahbub ul Haq


“…markets are not very friendly to the poor, tothe weak or to the vulnerable, either nationallyor internationally. Nor are markets free. Theyare often the handmaidens of powerful interestgroups, and they are greatly affected by theprevailing distribution of income….Is everybodyin a position to compete in the market, or willsome people fall outside the market-place becausethey do not have enough education, health andnutrition to compete on any footing, let alone anequal footing? That is why much betterdistribution of income and assets. of credit, ofpower structures and certainly of knowledge andskills are vital to making markets work moreefficiently. Markets cannot become neutral orcompetitive unless the playing field is even andplayable.”

(Mahbub ul Haq, 1995)

This wisdom of the founder of theHuman Development Centre has guidedus in developing a conceptual frameworkfor this report on globalisation andhuman development in South Asia. Thenew development paradigm thatunderpins the current globalisationprocess is based on an ideal view of theworld where markets work efficiently,capital and technology flow freely andthat people have all the knowledge,information and ability to take part in themarket on an equal footing. But in thereal world situation of most developingcountries, including South Asia, thisprocess becomes a nightmare for a greatnumber of people. As such, in this reportwe first try to understand theglobalisation process; secondly, weanalyse the policies through which thecountries of this region are attempting toget better integrated with the worldmarket; thirdly, we assess the costs andbenefits of the reform efforts; and finally,we try to develop an alternativeframework that would combine economic

growth with human development andbetter distribution of gains fromglobalisation.

What is globalisation?

The origin of globalisation can be tracedall the way back to the period ofcolonisation in the 16th century.However, the process of global economicintegration gained momentum only in the1970s with the development ofinternational capital markets. During thedebt crisis of the 1980s, severaldeveloping countries implementedprogrammes, popularly known asstabilisation and structural adjustmentprogrammes, to qualify for loans fromthe International Monetary Fund (IMF)and the World Bank. These programmesaimed at creating conditions forliberalisation of developing-countrymarkets. The process of outward-orientation gained momentum in the1990s when the World TradeOrganization (WTO) was establishedfollowing the conclusion of the UruguayRound of trade negotiations. Early 1990swas also the time when most South Asiancountries, heavily burdened by debt anddeficit, entered into programmes with theIMF and the World Bank and opened uptheir economies to the world tradingsystem.

Globalisation is defined as the freemovement of goods, services, people andinformation across national boundaries.It creates and, in turn, is driven by anintegrated global economy, whichinfluences both economic as well as socialrelations within and across countries. Theopening up of an economy increasescompetition internally as well asexternally, leads to structural changes inthe economy, alters consumer

“Markets cannotbecome neutral orcompetitive unlessthe playing field iseven and playable”

Chapter 1

Globalisation and Human Development:A Conceptual Framework


preferences, lifestyles and demands ofcitizens.

Globalisation means different things todifferent people. In business schoolliterature, it refers mainly to companyspecific strategies designed to overcomethe constraints of national boundariesthrough the mechanism of globalisedproduction and marketing networks. Inthe economic field, it is consideredsynonymous to economic inter-dependence between countries coveringincreased trade, technology, labour andinternational capital flows. In the politicaldebate, globalisation refers to theintegrative forces drawing nationalsocieties into a global communitycovering the spread of ideas, norms andvalues. Last but not the least, the tidalwave of global culture is sweeping theindigenous cultures the world over(see box 1.1).

Views about globalisation differ widely,influenced by the particular vantage pointof an individual or a country. In SouthAsia, for example, during the period ofglobalisation the absolute number ofpeople in poverty has increased, despitethe fact that the largest country in theregion (India) has been experiencing agrowth rate of over 6.5 per cent duringthis period of increased integration withthe global economy. Although the otherindices of human development in SouthAsia have improved during the last threedecades, they are still among the worst inthe world. Should it lead us to concludethat globalisation has been bad for humandevelopment in South Asia? If yes, thenshould we look for answers within ourown societies and governments? Or,should we look at the workings of theinstitutions of global governance for suchan inequitable outcome of globalisationfor the poor nations?

This is what we would like to explorein this report on Human Development inSouth Asia. The challenge facing SouthAsia is to use the forces unleashed byglobalisation for improving its humandevelopment while expanding oppor-

tunities for economic growth and overallsocio-economic development.

Nature and character of theglobalisation process

The nature and character of globalisationhas been fundamentally altered by newdevelopments in the information andcommunication technology and theglobalisation of financial markets. Thesedevelopments have enabled themovement of jobs to places where skillsare available for the information/communication technology sector. Butthe extent to which different countrieshave participated in globalisation is farfrom uniform. The least developedcountries have been, by and large,excluded from the globalisation process(with the possible exceptional case ofBangladesh). While some developingcountries, especially in East and SouthEast Asia, have increased their share in

Box 1.1 Views on globalisation

‘…Globalization encapsulates both adescription and a prescription. Thedescription is the widening anddeepening of international flows oftrade, finance and information in asingle, integrated global market. Theprescription is to liberalize nationaland global markets in the belief thatfree flows of trade, finance andinformation will produce the bestoutcome for growth and humanwelfare.’ (UNDP, HDR 1997)

‘…Globalization is a double-edgedsword: a powerful vehicle that raiseseconomic growth and increases livingstandards in rich and poor countriesalike, but also an immenselycontroversial process that assaultsnational sovereignty, erodes localculture and tradition and threatenseconomic and social stability.’(Robert J. Samuelson, InternationalHerald Tribune January 2000)

‘Globalization is praised for thenew opportunities it brings, such asaccess to markets and technologytransfer-opportunities that hold outthe promise of increased productivityand higher living standards. But

globalization is also feared… itbrings instability and unwelcomechange…exposes workers tocompetition from imports…undermines governments…’. (WorldBank, WDR 1999)

‘World 2000 is a misshapencreation demographically, eco-nomically and culturally. It is a worldCharles Dickens would recognize asthe best of times available for thelucky many and the worst oftimes…for even more numerousunlucky. Most of whom live in theThird World’. (Jim Hoagland,Washington Post, 1999)

‘Globalization has encouragedan explosion of wealth andtechnology never approximated inany historical epoch. Such rapidchange inevitably challengesprevailing social and culturalpatterns…A sense of politicalunease is inevitable—especially inthe developing world—a feeling ofbeing at the mercy of forces neitherthe individual nor the governmentcan influence any longer.’ (HenryKissinger 1999)


trade and capital flows, the bulk ofinternational flows are still situated withindeveloped industrial countries. It is nosurprise, therefore, that global integration,though rapid, has turned out to be quiteunbalanced with uneven participation ofcountries and people in the expandingopportunities from globalisation.

Flows relating to trade, investment andother capital flows, and technology andlabour are the cutting edge of theglobalisation process. These flows areboth the cause and effect of theemergence of a new global economicsystem in the post-war period. The mainelements shaping this new system are theemergence of a new global trading order,the unprecedented speed and scale ofglobal financial system, and the globalreach of multinational corporations. Thefacilitating roles of the information/communication technology revolutionand the ideology of free market capitalismhave been critical in shaping the neweconomic system in its current form. Therole played by civil society groups in bothdeveloping and developed countries inchallenging this new developmentparadigm and the evolution of universalnorms as a guide for economic policymaking have also been important factorsin shaping globalisation (Burki & Savitsky2000).

New global trade patterns

The rapid expansion of world tradeduring the last fifty years is a directoutcome of trade liberalisation efforts aswell as the evolution of a legal frameworkgoverning trade between countries. Theestablishment of GATT in 1947 hadstarted this process of trade liberalisation.There were a series of rounds of tradenegotiations. The latest of these rounds—the Uruguay Round— produced the mostfundamental reform of the world tradingsystem. In 1995, following the conclusionof the Uruguay Round of tradenegotiations, World Trade Organization(WTO) was established to settle tradedisputes among nations. All previous

rounds had facilitated the expansion oftrade flows for the manufactured goodsonly, as tariff and non tariff barriers weregradually reduced for the imports ofsuch goods. The last round had extendedthe scope of trade to include agricultureand services. Of special interest in thiscontext is the treatment given to newaspects of trade such as Trade RelatedInvestment Measures (TRIMS) as wellas Trade Related Intellectual PropertyRights (TRIPS). The rule based tradingsystem with a broader coverage ofcommodities and services has come tobe known as the new internationaltrading order.

This rapid increase in trade hasbecome the driving force in theglobalisation process. The phenomenalincrease in world trade flows has beenbeneficial to many countries participatingin trade. World exports had increasedfrom US$ 61 billion in 1950 to $315billion in 1980 to $3447 billion in 1990and $6844 billion in 1998. The share ofworld exports in world GDP has alsoincreased over time rising from 6 per centin 1950 to 16 per cent in 1992 and to 24per cent in 1998. The developingcountries including South Asia have alsoplayed a key role in the global expansionof trade. The share of exports fromdeveloping countries in total worldexports increased from 23 per cent in1991 to 31 per cent in 1998. It should,however be noted, that South Asia hadbarely managed to increase the share ofits exports in GDP, i.e., by only 1.5 percent from 8.2 per cent in 1991 to 9.7 percent in 1998. The key players in thedeveloping world in this context havebeen East and South East Asia which hadincreased the percentage of theirmerchandise trade in GDP from 40 percent to 60 per cent between mid 1980sand 1994 (Nayyar 1998, World Bank2000b & 2001).

The composition of world trade hasalso changed in at least three fundamentalways. The share of primary commoditiesin exports has fallen while that ofmanufactured goods especially of higher

Global integrationhas turned out to bequite unbalancedwith unevenparticipation ofcountries and people


value products has risen. Intra-firm andintra-industry trade has emerged as a keyfactor in the global trade expansion.Trade in services has outpaced the tradein goods. The sustained growth in tradeand the nature of its composition haveopened new opportunities for countriesto capture the benefits from globalisation.In South Asia, only India seems to havebeen able to take advantage of thisopportunity.

Global financial flows

The external savings are consideredcrucial for increasing investment rates indeveloping countries. For the poorcountries, with low domestic savingsrates, the reliance on external savings wasan obvious choice to raise theirinvestment rates. The most significantsource of external savings provided todeveloping countries initially was in theform of official development assistance(ODA). But ODA as a percentage ofdeveloped-country gross national income(GNP) never reached 0.7 per cent as wasexpected by the developing countries, andin fact went down considerably to a levelof about 0.3 per cent of the combinedGNP of developed countries.

However, private capital flows havefilled the gap, especially after the mid1980s. But the private capital is moremobile as well as more volatile thanODA. It is driven mainly by the profitmotive. The two main components ofprivate flows— portfolio investment andforeign direct investment (FDI)— haveexhibited rapid expansion in the 1990s.Portfolio investment has, however, beenmore volatile than FDI.

Foreign direct investment has obviousbenefits in terms of not only augmentingthe domestic savings but providingincreased access to technology,management skills and export markets.Like the world trade expansion,international investment flows have alsoshown rapid expansion. The stock of FDIworldwide has increased from US$ 68billion in 1960 to $502 billion in 1980 to

US$ 1948 billion in 1992 and US$ 3456billion in 1997. The FDI flows increasedfrom US$ 52 billion in 1980 to US$ 171billion in 1992 and to US$ 360 billion in1997. The stock of FDI in world GDPand FDI inflows as a percentage of grossfixed capital formation have gone upconsiderably (Nayyar 1998, World Bank2000b, 2001).

The geographical trend of FDI showsthat it has gone mainly to theindustrialised countries. This is true forall indicators of FDI. The share ofdeveloping countries in FDI stock hasincreased in relative terms from 22 percent in 1992 to 30 per cent in 1997.However, FDI stock as well as flows areconcentrated mainly in a few developingcountries including, China, Mexico andBrazil. According to data available for1998/1999, the share of South Asia inFDI inflows has so far been insignificant.South Asia’s share in total FDI inflowsto developing countries was only 1.8 percent in 1999. The lop-sided geographicaldistribution of FDI is also reflected inthe sectoral distribution of such flows.Services and manufacturing sectorsaccount for the bulk of these flows. Theshare of primary sectors, which are thedominant producers and employers inmost of the developing countries, hasbeen low and falling.

The rising influence of internationalfinancial markets and the importance ofshort and long-term capital flows havebeen driving the global integration ofeconomies. The internationalisation offinancial markets is reflected in anexplosive growth of portfolio investmentflows and bank loans in the 1980s and1990s. Like FDI, such flows are alsosituated mostly in the developedcountries. The bulk of such flows areshort-term capital flows. Mutual fundshave emerged as major players. Themovements in interest rates and exchangerates determine the direction and themagnitude of these flows. Countries thatmanage their economies well are in abetter position to attract private capitalflows and benefit, relative to those

Rising influence ofinternationalfinancial marketsand the importanceof short and long-term capital flowshave been drivingthe globalintegration ofeconomies


countries which have poor macroeconomic policies.

Global reach of MNCs

An important development in theglobalisation process has been theemergence of trans-border productionnetworks between firms located indifferent countries. Such firms employglobal strategies including worldwidesourcing of materials and locatingactivities in many different nations. Theincreased volumes of FDI has enabledmultinational corporations to transferprocess and product technologies acrossnational borders and by doing so enhancetheir competitiveness. The emergence oftrans-border production networks hasglobalised production of goods andservices as different components areproduced in different locations in manycountries. The flexible productionsystems have reduced the importance of

economies of scale since enterprises neednot be large to participate in the globalmarkets. The small countries can alsodevelop a niche for themselves in the newsystem (see box 1.2).

Information/communication technology

The information and communicationtechnology (ICT), in particular theinternet, is the most visible componentof an integrated world. This technology,with its tremendous potential for bridgingthe time and space and the income andknowledge gaps, has had a dramaticimpact on the globalisation process. ICThas reduced the geographical barriers totrade, finance and productionrelationships between actors spread allover the world. ICT has changed thecompetitiveness of countries and helpedincrease capital market inter-nationalisation by reducing transactioncosts. But in order to harness thepotential of ICT, a country needs to havean educated and skilled labour force. Howglobalisation impacts on humandevelopment in South Asia would dependa lot on how these countries could takeadvantage of this technology.

Challenging globalisation

After the financial crises in Latin Americaand East Asia, both the process and theoutcome of globalisation are beingchallenged. The critics of globalisationargue that in order to understand theglobalisation process and its outcome, weneed to deconstruct globalisation. Thisexercise is important to highlight the factthat not all the components, or flows, ofglobalisation are moving at the same paceand in the same direction. While capitalhas free movement and information andcommunication are getting freer, labourmovement, especially the unskilled, isrestricted, and trade is not fully liberalised,especially of goods of particular interestto developing countries.• Financial flows have been globalised.The increased mobility of capital has

Box 1.2 Teleworking: India’s new growth sector

In recent years multinationalcorporations, mostly from thedeveloped world, have begun to usestrategies that would reduce costswithout lowering quality and efficientuse of time. A whole range of work—from customer service to ordinaryaccounting work and transcribingmedical records—is being shifted outof headquarters in developedcountries to developing countries. InIndia, which has a large pool ofEnglish-educated human resource foruse in this new area of globalisedemployment, this has led to thegrowth of a new service industry thathas the potential to earn more thanthe highly skill-intensive computerprogramming sector. It is predictedby NASSCOM, the main nationalassociation of information technologycompanies that by 2008 1.1 millionIndians would be employed andapproximately US$17 billion will begenerated by such ‘IT-enabledservices’.

Companies like GE Capital Serviceshave been outsourcing India for simple

jobs such as collecting money fromdelinquent credit card users. BritishAirways along with other airlines likeSwissair have large centres forprogramming and handlingeverything from computer messagesto ticket booking information. It hasbeen estimated that 40-50 per centof cost is saved by such companiessimply by shifting these type of workto India.

But cost-effectiveness is not theonly attraction of India; thestandards of service provided by theIndians are just as good. As a matterof fact, currently the standards arevery impressive: Funds International,part of a company spin-off fromDeluxe (America’s main printer ofcheques) has cut the number oferrors in data processing for oneclient by 90 per cent. Furthermore,the days taken to close monthlyaccounts have been reduced to threefrom five. Indian workersoutperform their U.S. counterpartsdue to greater job determination andhigher qualifications.

Source : Outsourcing To India, The Economist, May 5th 2001.


positioned some countries to boost theirinvestment rates beyond their domesticsavings rates. Such flows in the form offoreign direct investment have alsofacilitated the transfer of technology.However, most capital flows take placewithin the developed countries and a fewselected developing ones.• Technology flows have also been largeand growing. Although there is asymmetryin sharing some technologies between thedeveloped and developing countries, in thecase of information technologies thetransfer to the developing countries hasbeen relatively more liberal.• In theory, free trade betweendeveloped and developing countries leadsto a more efficient structure ofproduction and expanded opportunitiesfor consumption. Both are expected tolead to higher national and world incomeand welfare. But trade rules are highlyasymmetrical between developed anddeveloping countries. There are all kindsof restrictions on trade in goods andservices in which developing countriesenjoy comparative advantage. The tradein agriculture has been restricted by highsubsidies and non-tariff barriers indeveloped countries. While developingcountries have drastically reduced tariffson goods from developed countries,products from developing countries,especially processed and semi-processedgoods face non-tariff barriers and tariffescalation. Then there is the constantthreat of invoking social (labour andhuman rights) and environmental clausesfor continued protection against thegoods of interest to the developing world.• Labour mobility among countries hasnot always been restricted. Movements oflabour from Europe to the areas of newsettlement (the USA, Canada, Australia,South Africa and Latin America) was freebefore the First World War. Restrictionsof such movements have increased afterthe Second World War. These haveapplied mostly to unskilled labour.Restrictions on the movement of skilledlabour, especially scarce professionalmanpower, have been much less

pronounced; indeed, to the pressures toemigrate has recently been added intensedemand in the rich countries for theseskilled people, depriving the developingcountries of this scarce resource onwhose education they may have spentlarge sums.

Overall, it seems that despite therhetoric of free trade the terms and rulesguiding globalisation are loaded againstthe developing countries. A balance sheetof gainers and losers in the globalisationprocess, shows the uneven burden borneby the poor within and among nations(see box 1.3). This is the reason why theopponents of globalisation raise theirvoices in global forums.

Globalisation and South Asia

The ongoing globalisation process inSouth Asia has focussed on integratingmarkets without improving the conditionof the vast majority of South Asians. As

Box 1.3 Gainers and losers of globalisation

Gainers Losers

Output Employment

People with assets People without assets

Profits Wages

People with high skills People with low skills

Educated Uneducated

Professional, managerial Workersand technical people

Capital Labour

Creditors Debtors

Those independent of Those dependant onpublic services public services

Large firms Small firms

The strong The weak

Risk takers Human security

Global markets Local communities

Sellers of technically Sellers of primary and standardsophisticated products manufactured products

Global culture Local cultures

Global elite Global poor

Firms with market access Firms without market accessand branding and no branding

Source : Streeten 1998.


a result, income inequalities havewidened, the number of people in povertyhas gone up during the period ofglobalisation, and human developmentlevels, though improved since 1960, havestarted to stagnate or decline. The poorare being increasingly marginalised. Someethnic groups are virtually faced with acomplete exclusion from the benefits ofglobalisation.

The magnitude of unemployment and/or underemployment has always beenhigh in South Asia. The problem has beenmade worse by recent policy initiatives.Trade liberalisation has exposed domesticindustries to fierce competition fromimports. Over-staffed public enterpriseshave been either privatised or restructuredresulting in loss of jobs. The effects ofimplementation of IMF stabilisation/adjustment packages have beendeflationary on the economy. Theshortage of capital has reduced the abilityof the private sector to absorb the laid-off workers. The increased exports oflabour-intensive goods that was expectedto happen never did. Trade barriers havedampened the demand for manufacturedgoods from South Asia. So the workershave seen globalisation as leading to joblosses, increasing work insecurity andlower wages.

The empirical evidence also supportsthe view that globalisation increasesinequality within and between countries,and also between different sectors. A fewglobalised enclaves, such as exportprocessing zones, in a vast hinterland arethe most commonly observed features ofglobalisation in developing countries. Theskilled labour and the innovators in theICT in India and in other South Asiancountries have concentrated themselvesat the technology parks. This hasincreased job opportunities for the skilledbut it has also led to increased incomeinequality. The worsening of incomedistribution is also due to proportionatelymore gains accruing to capital and rentsthan to wages.

One of the negative side-effects ofglobalisation has been the breakdown of

traditional support systems in thecommunity. The bond betweenemployers and employees and betweendifferent social groups has become weak.Victims of globalisation do not have thesupport to ride over the bad times.Simultaneously, the ability ofgovernments to put in place social safetynets has become weak. To attract privatecapital, tax rates have been reduced. Tariffreductions have reduced the sources ofrevenue for governments. The revenuelosses have come at a time when morerevenue is required in order to financethe much needed infrastructure, socialservices and other anti-poor programmes.The erosion of the governments’ abilityto help the victims of globalisationprocess needs to be arrested if theoutcome of globalisation is to benefit allpeople in South Asia.

The uneven and unbalanced nature ofglobalisation in South Asia has inflicted asocial cost. Fortunately, to-date theglobalisation era in this region is in itsearly stages. A rethinking of the wholeprocess is called for in order to minimisethe risks and maximise the benefits ofglobalisation.

Rethinking globalisation

The restriction of labour flows betweenthe South and North, the volatility ofshort term capital flows, the mismatchbetween the efficacy of institutions ofgovernance and the potential of regionalassociations are some of the issues thatneed to be examined in the context ofSouth Asia.

Neglected labour flows

Most discussions on globalisation tend tobe limited to trade and financial flows.Indeed, these are the most obviousmanifestations of a world withincreasingly porous borders, wheremassive amounts of capital can betransferred from one end of the world tothe other in a matter of seconds.Nevertheless, the theory of trade is not

The uneven andunbalanced natureof globalisation inSouth Asia hasinflicted a socialcost


simply limited to capital flows, but alsoextends to other factor endowments.Specifically, labour as a factor ofproduction features heavily in any tradetheory. Unfortunately, the importance oflabour flows in this era of globalisationhas been somewhat overshadowed by theconstant discussion of capital movement.Even when labour movements arediscussed, they are discussed most oftenin the form of remittances and transferpayments within and across countries.

This is not to say that the socialimpacts of globalisation are not discussed.Indeed, the single most importantconcern in this day and age is howconsumers and workers across the worldare affected by liberalising trade andfinancial markets. However, the questionthat begs to be answered is how labouras a factor of production affectsglobalisation. This will not only shed lighton the true nature of globalisation andhow best to benefit from it, but will alsoprovide further insight into how peopleacross the world are faring.

Conventional trade theory is governedby the law of comparative advantageaccording to which it can be predictedthat developing countries export labour-intensive goods to the developedcountries. According to factor priceequalisation theorem, there would occura convergence of incomes. However ifonly capital is allowed to move freelyacross borders, then not only is it unlikelythat there will be convergence ofincomes, but the benefits from trade willbe extremely skewed.

Naturally there is never likely to be aworld without any national restrictions atall on capital or labour flows.Nevertheless, by omitting considerationof labour flows, the broad framework ofglobalisation suffers from incompletenessand, much like the experience to date, islikely to adversely affect some players inthe world economy. Therefore, it isextremely important to rethinkglobalisation with this in mind and toassert that globalisation is concerned withthe fate of people. A discussion of labour

flows fundamentally alters the concept ofglobalisation and allows for not only amore complete analysis but the prospectthat better policies be put into place thattake account of the various facets ofglobalisation and thereby derive greaterbenefit from it. It is important to notealso that technology as a factor ofproduction has become increasinglyimportant in the past few years andshould also not be neglected.

The stipulated benefits of globalisationare basically expanded opportunities—better opportunities for work, morechoice in terms of consumption, higherquality of goods and services available, allat a lower cost. While this has occurredfor a minority of South Asians, therealities faced by most South Asians as aresult of globalisation to date have beenharsh. Indeed, for most South Asians theoutcomes of globalisation have beenhigher prices, fewer employmentopportunities, increased disparities inincome and higher incidence of poverty.Poor terms of trade have made mattersworse.

It becomes obvious that all of theseissues relate more to capital flows than tolabour flows, at least on the surface. Theonly regularly mentioned issue relating tolabour movements in such discussions isthat of remittances. Interestingly however,remittance payments to South Asia fromits own workers abroad were greater inthe 1970s, prior to the present era ofglobalisation. This highlights the fact thatthe labour flows abroad have actuallydecreased in the past ten to fifteen years,which is when the movements of capitaland technology have increasedimmensely. Therefore a central piece ofthe globalisation puzzle seems to bemissing.

The current vogue of open markets isclearly limited to capital and to an extenttechnology markets. Indeed thedeveloped economies of the West havean aversion to unskilled or low-skilledlabour from South Asia, despite having ahuge bias in favour of skilled labour fromthe region, particularly from the

For most SouthAsians the outcomesof globalisation havebeen higher prices,fewer employmentopportunities,increased disparitiesin income andhigher incidence ofpoverty


Information Technology (IT) field.Policies that limit immigration in thedeveloped world seriously affect SouthAsian labour and industry.

In a world where trading partners areoften at extremely disparate levels ofdevelopment, and where factorendowments are very different, aglobalising economy is affected heavily bylabour movements or their absence.

Managing volatility

The occasional financial crisis causingwidespread misery provides a strong casefor evolving a policy package to limitextreme volatility. Some of the crucialelements are strengthening of financialsectors and particularly stock and bondmarkets, controlling excessive inflow ofshort-term capital, having an adequatelevel of foreign reserves and evolvingcredible policy-making institutions inmonetary and fiscal areas. South Asia hasweaknesses in most of these areas exceptthat the governments still retainconsiderable control on the inflow ofshort-term portfolio flows. Action in allother areas is needed before the regionfaces a serious crisis.

Relative roles of local, national and globalinstitutions of governance

The issue of reviewing the relative rolesof local and national governments,international institutions and internationalcivil society in a rapidly globalising worldhas become urgent to ensure that theintegrated world works for people andnot the other way around.

The revolution in technology hasmoved much faster than the institutions.The nation-state is in need of a massiverethink. It is too big for small things andtoo small for big things. There is a needfor some of its function to be delegateddownwards and some upwards (Streeten1998).

The shifting downwards of somefunctions is a response to the demandfor localisation and decentralisation, i.e.,

greater political, fiscal and administrativeautonomy. The cry for local participationin governance structure is a worldwidephenomenon; South Asia is no exceptionto this new trend. Some governments inthis region have gone a long way towardsa real devolution of power to the level ofthe local communities.

The case for upward delegation ofsome functions is straightforward. Ifmarkets are global, their regulation mustthen rest with a global authority. Theexamples of possible institutionalinnovations include a global central bank,a global energy facility, and a globaltechnology policy. The danger to avoid isthat the global institutions need notsubject countries to blue print formulasand should instead concentrate onimproving processes and rules. However,the exact details of the possible functionsof institutions of global governance needto be carefully thought through.

The nation state, despite a doublesqueeze on its roles, remains an importantentity. In two areas particularly the roleof the nation state has become moreimportant than before: (a) in acceleratinghuman development, and (b) in providingsocial protection to the vulnerable.

(a) Success in the global economy, forindividuals as well as for nationaleconomies, depends on their levels ofeducation and training, that is, on theirhuman development achievements.Human development then is more thancrucial for further advance in economicgrowth, and for subsequently greaterachievements in human development.Spreading education to everyone is animportant means of spreadingopportunities and incomes andcountering the tendency for risinginequality and social exclusion.

(b) Globalisation has been accom-panied by rising vulnerability ofindividuals, families, communities andregions. National economic fluctuationsrise and individual job insecurity rises.Moreover traditional mechanisms forprotecting people in these situationsweakens. It is essential for economies to

The nation state,despite a doublesqueeze on its roles,remains animportant entity


put in place new mechanisms of socialprotection. However, the tendency is inthe opposite direction because ofdownward pressure on tax revenue andsocial expenditure.

Regionalism in a globalised world

Globalisation manifests itself as asignificant expansion of world trade,investment, technology and labour flows.The globalised economy hassimultaneously witnessed a process ofregionalisation. More than 23 RegionalTrading Arrangements (RTAs) havebeen notified to GATT and its successororganisation, WTO. These RTAs, andrelated arrangements in the areas ofregional cooperation, liberalise regionalflows of investment, labour andcommodities trade, transformingnational economies into regionaleconomies.

The question that is often raised iswhether the policies of globalisation andregional integration can be reconciled. Inother words, whether existing orproposed regional blocs are buildingblocks or stumbling blocks toglobalisation?

The answer to the puzzle lies in theform most blocs would take. If tradecreation prevails over trade diversion,such blocs would lead to effectiveglobalisation. If trade diversiondominates, there is a real danger ofglobalisation being effectively blocked. Inthe case of South Asia, open regionalismis the ideal form to support. The regionshould itself form an effective bloc of itsown to gain an increased voice ininternational negotiations and also tobenefit from increased intra-regionaltrade.

• • •

This Centre’s annual reports analyse everyissue from the vantage point of people.“Do people participate in economicgrowth as well as benefit from it? Dothey have full access to the opportunitiesof expanded trade? Are their choicesenlarged or narrowed by newtechnologies? Is economic expansionleading to job-led growth or job-lessgrowth? Are ‘free’ markets open to allpeople?” (Mahbub ul Haq, 1995). Theseare some of the issues we intend toaddress in this report.


BLANK

20

Trade and Financial Globalisation of South Asia 21

2Trade and Financial

Globalisation of South Asia

It is simply unacceptable that whileaid transfers so few resources to thedeveloping world, several timesmore is taken away through tradeprotection, immigration barriers andan increasing debt burden. In sucha situation, it is critical for poornations to bargain for moreequitable access to global marketopportunities.

– Mahbub ul Haq


As defined in chapter 1, globalisation is amulti-dimensional process, encompassingeconomic, political, cultural and socialdimensions. While each of these forcesundeniably shapes the impact ofglobalisation for human development, thefocus in this report is on its economicdimensions. In this context, globalisationrefers to the increasing movements ofgoods, services, finance, and factors ofproduction across national borders. Overthe past decade, the level of global tradeand investment have reachedunprecedented heights, and morecountries than ever are integrating intoglobal economic networks. The purposeof this chapter is to examine how farSouth Asia has participated in thisprocess, using the extent of trade andcapital market integration as the criteria,as well as the fundamental changes thathave occurred in those sectors, as theyhave been driving the globalisationprocess world-wide.

Until the last decade, South Asia wasone of the least integrated regions in theworld economy. Following independence,most countries in the region favoureddevelopment strategies which limited theregion’s participation in the globaleconomic system. Historical circumstancesclearly played a role, as South Asia’scolonial heritage fostered the sentimentthat a more open economy, as underBritish rule, would lead to exploitation.India led the way in pursuing inward-oriented policies that accorded the state adominant role in directing economicdevelopment and limited the developmentof the private sector. A vast network ofgovernment controls and subsidiesemerged to manage economic decision-making as well as economic assets,comprising the well-known panoply ofovervalued exchange rates, quantitative

restrictions and tariffs, and industrialregulations associated with import-substitution industrialisation (Bhagwati1993). Although Pakistan initially pursuedmore outward-oriented policies based onprivate sector development, it eventuallyfollowed suit, as did other countries in theregion. By the 1970s, all South Asiancountries were pursuing inwardly-focusseddevelopment strategies.

By the late 1980s, however, thesituation was fundamentally altered.Confronted by lagging growth rates andexternal payments crises, the majority ofSouth Asian countries adopted a moreoutward-oriented development strategy,emphasising greater integration with theworld economy. The system of import-substitution based on controls andincentives was gradually replaced by:(i) near current account convertibility;(ii) reductions in the level of quantitativerestrictions and tariffs, as well as moreuniform rates of protection; (iii) improvedincentives for exports; and (iv) a morehospitable environment for foreigninvestors. Although it is difficult to datethe beginning of reforms exactly,Bangladesh and Sri Lanka beganreforming first during the late 1970s,while Pakistan and India began last,starting in 1991. By the early 1990s, allcountries had begun reforms to maketheir economies more open.

What has been the effect of thesechanges? Have they helped in bringingabout a greater integration of South Asianeconomies into the world economy?

Trade integration

Level of trade integration

Integrating the region’s trade flows moreclosely into international markets has

Confronted bylagging growth ratesand externalpayments crises, themajority of SouthAsian countriesadopted a moreoutward-orienteddevelopment strategy

Chapter 2

Trade and Financial Globalisation ofSouth Asia


been a fundamental focus of theliberalisation efforts in South Asia. Oneway to measure the level of thisintegration is to examine import tariffrates, which serve as a proxy for thedifference between domestic andinternational prices. According to thisindicator, South Asia has become moreintegrated into the world trading systemover the last decade. Average tariff rates,which were among the highest in theworld at the start of the 1990s, fell rapidlyin all countries by the end of the decade.The decline has been particularly dramaticin Bangladesh, where average tariff ratesfell from 114 per cent to 22 per cent, andin India, from 82 per cent to 32 per cent(table 2.1). The 1990s also saw all SouthAsian countries reduce the level of non-tariff barriers (Panagariya 1998; Kemal2001). Nevertheless, South Asia remainedless integrated in terms of this indicatorthan other developing regions. At theclose of the 1990s, average tariff levelsstill hovered around 20 per cent,compared to 9 per cent or less in Koreaand Malaysia, and 14 per cent or less inBrazil and Mexico (table 2.1).

Table 2.1 Mean unweighted tariffrates (%)

All Primary Manufacturedproducts products products

Bangladesh1989 106.6 79.9 110.51999 22.0 22.4 22.0

India 1990 79.1 69.6 80.31999 32.2 30.5 32.4

Nepal 1993 24.0 15.7 26.01999 17.7 12.9 18.9

Pakistan 1995 50.7 44.5 51.41998 46.5 42.7 46.9

Sri Lanka 1990 28.3 31.8 27.91997 20.1 23.9 19.7

Memo Items

Korea 1990 13.3 15.7 12.71999 8.7 12.8 7.8

Malaysia 1991 16.9 15.3 17.81997 7.1 6.0 7.5

Brazil 1991 25.1 19.8 26.31999 13.6 10.8 13.9

Mexico 1991 13.2 12.2 13.31999 10.1 11.5 10.0

Source : World Bank 1998, 1999a, 2000c, 2001.

Another indicator of the degree oftrade integration is the share of trade innational income. Countries that are highlyintegrated in the world economy tend toexhibit a high trade to GDP ratio. Thetrend along this indicator also shows anincreasing level of trade integration inSouth Asia (figure 2.1). Trade to GDPratios for the region as a whole rose from19 per cent during the 1980s to 26 percent during the 1990s.1 The rate ofintegration has been rapid, with trade toGDP ratios increasing from an averageof 0.1 per cent per year during the 1980sto 3.6 per cent per year during the 1990s,only slightly slower than East Asia (5 percent), but faster than Latin America(2.2 per cent) (see annex table 1). Again,when viewed in a comparative context,however, South Asia remained among theleast integrated regions; its overall tradeto GDP ratio four times less than that in

Figure 2.1 Improving trade to GDP ratios

Source : World Bank, World Development Indicators CD-ROM, 2000.

1 It must be kept in mind that trade to GDP ratios arean imperfect measure, subject to systematic influences,such as a country’s size (varying inversely), and tomovements in real exchange rates. Examining thePPP-adjusted trade to GDP ratios tells a slightly differentstory (see annex table 2). They report very little changein the share of trade to GDP in South Asia between the1980s and 1990s, as well as lower ratios for other regionsas well. But the PPP corrected ratios are a conservativemeasure because the GDP of many developing countriesis larger in PPP terms than at official exchange rates. Theactual change in South Asia’s trade to GDP ratios istherefore likely to fall somewhere in between thenominal and PPP-adjusted ratios, the former serving asan upper bound and the latter a lower. That is, SouthAsia’s trade to GDP ratios have most likely increased, butless than reported by nominal figures.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

South Asia Low income World * Sub-Saharan Africa East Asia & Pacific

1981-89 1990-98*1990-97


East Asia and sub-Saharan Africa(figure 2.1).

Export performance

To reap benefits of globalisation as wellas to ensure a balanced integration withthe external economies, it is absolutelyessential to improve the performance ofthe export sector. Empirical studies haveshown that export growth promotesefficient allocation of resources, as wellas generating dynamic sources of growth,for example, by raising productivity(Srinivasan 1998). How have South Asianexports performed since the period oftrade liberalisation?

Compared to the era before reforms,South Asia’s subsequent exportperformance has improved rapidly. Theshare of exports in regional GDPexpanded from 7.6 per cent during the1980-84 period to 12.4 per cent duringthe 1995-98 period (annex table 2). Asthis occurred during a time of positiveGDP growth, the increase indicates realexport expansion. Exports grewextremely fast at 10 per cent per annumduring the 1990s, almost double the ratea decade earlier and among the highest inthe developing world (annex table 3). Theincreasing importance of exports wasespecially evident in Bhutan, Nepal andSri Lanka, unsurprising given their smallsize, but was also the case throughoutthe region. In India, for example, exports

as a per cent of GDP nearly doubledfrom about 6 per cent at the start of the1980s to 11 per cent at the end of the1990s.

Part of the reason for this extremelyfast export growth during the 1990s lieswith the changes in real exchange rates.Between 1990 and 1996, the real effectiveexchange rate depreciated by nearly30 per cent in India, 15 per cent in Nepal,and Bangladesh, and 10 per cent inPakistan, making exports morecompetitive (annex table 4). Sri Lanka wasthe exception, with the exchange rateappreciating around 10 per cent over thefirst half of the 1990s. Despite becomingmore competitive, South Asia’s share oftotal world exports remained minimalboth before and after reforms, comprisingonly about one per cent, up from half aper cent a decade earlier (annex table 5).In comparison, the relevant shares forEast Asia and Latin America in 1997 were8.7 per cent and 4.4 per cent, respectively.

Export structure

Export expansion, however, is only halfof the story. Equally important is howthe export structures have changed inresponse to new opportunities in theglobal trading system. Historically, fast-integrating countries, such as those inEast Asia, have progressively increasedthe share of manufactured goods inmerchandise exports. Over the past twodecades, South Asian merchandiseexports have also followed this trend,gradually shifting away from primarycommodities, such as, unprocessedcotton, jute and tea, towards moremanufactured goods. The share ofmanufactured goods in the region’s totalmerchandise exports grew from 53.8 percent in 1980 to nearly 77.6 per cent in1997, comparable to the world (79.6 percent) and East Asian ratios (82.4 per cent)(annex table 6). The ratio in 1998 rangedfrom 91 per cent in Bangladesh to 73 percent in Sri Lanka.

Within manufactures, labour-intensivegoods, such as garments and textiles,

South Asia’s exportperformance hasimproved rapidly.The share of exportsin regional GDPexpanded from7.6 per cent duringthe 1980-84 periodto 12.4 per centduring the 1995-98period

90

80

70

60

50

40

30

20

10

0

Bangladesh India Nepal Pakistan Sri Lanka

1981-85 1991-94

Figure 2.2 Share of clothing and textiles in total exports

Source : World Bank 1997a.


gems and jewellery and leather products,dominated manufactured trade (see, e.g.,World Bank 1997a). Fibres, textiles andclothing, in particular, have becomeextremely important to South Asia’sexports. Their share increased in allcountries for which data is available,comprising nearly three-quarters of allexports by the mid-1990s in Bangladesh,Nepal and Pakistan, and nearly half inSri Lanka (figure 2.2).

Given the importance of textiles andclothing in exports, the gradual phasingout of the Multi-Fibre Arrangement(MFA) by 2005 holds importantconsequences for South Asia’s worldshares in these sectors. The potentialeffect of removing the imposed quotason exports of garments to developedcountries depends on a number offactors, but the gains to South Asiancountries from phasing out of the MFAare expected to be large because they areseverely constrained by quotas and areamong the lowest cost producers(see, e.g., ESCAP 1998b). The largestgains will most likely be in India, whichhas the most constrained apparel sectorin South Asia. Other South Asiancountries will also benefit from abolitionof quotas, but less so, as they are typicallyless-restricted suppliers.

While these labour-intensive industriesare a source of growth in employmentand exports, and historically have beenimportant for the industrialisation processin other countries (e.g., the UK andJapan), what is particularly important inthe age of rapid globalisation is the extentto which countries are moving fromtraditional exports to producing goods ofhigher value-added, particularlytechnologically advanced products. Therehas been growing concern that labourintensive, low-technology manufacturesare beginning to acquire the features ofprimary commodities in world markets,facing a secular downward trend(UNCTAD 1999a). In South Asia, theshare of high technology exports has beenmarginal, rising slightly from 2.1 per centof total manufactured exports in 1991 to

3.85 per cent in 1997 (table 2.2). Incontrast, high-tech exports rose rapidlyin East Asia and Latin America duringthe 1990s, accounting for nearlyone-quarter and one-tenth of totalexports, respectively. India is the countrywith the fastest growing share of high-technology exports.

An area of increasing importance forexports in all countries has been in theservices sector. Although the trade ingoods has traditionally dominated, tradein services has increased in importance asa result of reductions in domestic andinternational barriers brought about by theGeneral Agreement on Trade in Services(GATS), and technological changes thathave made services more tradeable.Exports of services in the region doubledfrom US$5 billion per year during the1980s to more than US$10 billion per yearduring the 1990s, although they stillaccount for only one per cent of theworld’s total (annex table 7). An importantservice export from the region has beenthe supply of labour to other countries,particularly to those in the Middle Eastand East Asia. Their remittances haveformed a very important source of foreignexchange for most South Asian countries,and are among the highest in the world,growing from roughly half a billion dollarsper year during the 1980s to more thanone billion during the 1990s (annextable 8). Given the importance of theseremittances, the restrictions to the freeflow of labour in other countries remain aconcern for South Asia.

Table 2.2 Share of high technology exports in manufactured exports

1991 1992 1993 1994 1995 1996 1997

Bangladesh 0.05 0.06 0.02 0.07 0.03 0.06 0.01India 3.07 2.32 2.63 3.20 4.52 5.38 5.09Pakistan 0.03 0.04 0.07 0.04 0.05 0.05 0.10Sri Lanka 0.67 1.05 1.12 1.27 n/a n/a n/aSouth Asia 2.08 1.56 1.82 2.30 3.36 3.99 3.85

Memo Items

East Asia &Pacific 20.64 16.93 19.12 20.52 23.40 25.02 26.60Latin America& Caribbean 5.63 6.79 6.64 7.45 8.87 9.04 9.55



Table 2.3 Percentage of total exportsaccounted for by top threeproducts

1983-84 1994-95

Bangladesh 56.4 46.3India 30.7 24.5Maldives n.a. 64.0Nepal 36.7 80.9Pakistan 35.0 41.4Sri Lanka 69.0 38.1Korea 36.1 25.0Malaysia 48.7 28.8Singapore 41.1 37.8

Source : UNCTAD 1999b.

Export diversification

Increasing trade integration requires awell-diversified export base, geo-graphically as well as by product.Dependence on a few exports and exportmarkets increases significantly the risksassociated with market fluctuations. SouthAsian economies have increasinglybecome less dependent on primarycommodity exports, increasing the shareof exported manufactured goods asdescribed above. Only Bhutan and theMaldives still had primary commoditiescomprising more than 50 per cent of totalexports during the 1990s (ESCAP 1997b).Most South Asian economies have,therefore, decreased their vulnerability toevents in commodity markets.

Export vulnerability, however, can alsoresult from dependence on a limitednumber of export products. A highdependence on a few exports can rendercountries vulnerable to variations inexport earnings and economicperformance, independent of whetherexports are primary commodities ormanufactured goods. Although mostSouth Asian countries have shifted awayfrom primary commodities, their exportstructures remain relatively concentratedinto a limited number of exports(table 2.3). The percentage of totalexports accounted for by the three mostimportant products in 1994-95 was above60 per cent in the Maldives and Nepal,and 40 per cent or more in Bangladeshand Pakistan. Only India had a ratio of

less than 30 per cent, comparable to thatfound in high-exporting countries of EastAsia. Nepal, Maldives and Pakistan’sconcentration indices all rose during the1990s, suggesting increasing exposure toexport risk. The major source of theregion’s export concentration has been,as already mentioned, the textile andclothing industries, which in somecountries accounted for more than 75 percent of export revenue. The concen-tration of exports on cotton fibre, fabricand garments leaves countries not onlyvulnerable to swings in cotton prices, butalso to production failures, for instance,from drought, disease, and pests. InNepal, the situation has been precariouswith just one product, carpets, accountingfor more than half of all merchandiseearnings (UNCTAD 1999b).

Export diversification can also bejudged in terms of the destination ofexports. The 1990s saw a redirection ofthe region’s exports away from EasternEurope and developing countries, and anincreasing concentration towardsdeveloped countries, which absorbednearly 50 per cent or more of totalexports (annex table 9). The United Statesand European Union have becomeespecially important markets forBangladesh, Pakistan and Sri Lanka, andEast Asian countries markets for India.The growing concentration of exports toindustrial countries has been particularlyacute in Bangladesh and Sri Lanka, wherethey make up more than three-quarter oftotal exports.

Intra-regional trade

The low level of exports directed atdeveloping countries is especially evidentin the level of intra-regional trade inSouth Asia. As discussed in chapter 5,intra-regional trade can convey manybenefits. For example, it can reducetransactions costs associated withlinguistic and cultural differences, as wellas unfamiliarity with administrative andlegal systems (ESCAP 1997b). It can alsostimulate trade-creating opportunities


through regional spill-overs and othercomplementarities. More importantly,perhaps, it can also create opportunitiesfor cooperation in other areas, such as inthe political arena. Despite these potentialgains, the level of trade between SouthAsian countries has been low. At the endof the 1990s, trade between South Asiancountries barely accounted for 5 per centof the region’s total trade in 1998, upfrom only 2 per cent at the start of thedecade (annex table 10). This is in starkcontrast to the 40 per cent or more oftotal trade accounted for by tradebetween neighbouring countries in theEast Asian and NAFTA regions. Thelevel of South Asia’s intra-regional trade,however, is likely to be much higher thanreported by official statistics, as illegaltrade between neighbours is thought tobe substantial, particularly betweenBangladesh and India, and between Indiaand Nepal (ESCAP 1997a). Moreover,within the past decade, several countrieshave become more reliant on South Asianmarkets for exports and imports. India,for example, has become an increasinglyimportant export destination for Nepal,absorbing 33 per cent of total Nepaleseexports in 1998, up from just 7 per centin 1990 (annex table 11). Similarly,Bangladesh, Nepal and Sri Lanka havemore than doubled their imports fromIndia (annex table 12). India’s importsfrom South Asia as a whole, however,have failed to keep pace, and accountedfor only one per cent of its total importbill in 1998.

External payments situation

Balance-of-payment concerns havetraditionally played a decisive role in thedesign of trade policies in South Asia.During the period of import substitution,policy makers utilised high rates ofprotection, export subsidies, and foreignexchange controls as a means to managetrade balances and current accountdeficits. A fundamental consequence ofadopting more liberal trade policies,however, has been the relaxation of such

controls. What has been the effect on theexternal payments situation in SouthAsia?

Although a deterioration in the tradebalance generally accompanies tradeliberalisation due to a surge in imports,South Asia’s trade deficit actuallyimproved from an average of -4.6 percent of GDP during the 1980s to -3.5 percent during the 1990s, the result of strongand sustained export growth thatoutpaced import growth by one per centper year on average (annex tables 13and 14). The current account movedbroadly in line with the trend in the tradebalance, remaining in deficit over the pasttwo decades (annex table 15), but alsoimproving during the 1990s in allcountries except Nepal and Pakistan, thelatter as a result of international sanctionsimposed following nuclear tests. Therewas large variation in current accountdeficits, though, ranging from quite lowin India (1.2 per cent of GDP) during the1990s, to quite high in Bhutan (13.3 percent). The external payments situation inmost countries remains vulnerable tocyclical downturns, as most have poorlydiversified export bases. In addition, inBangladesh, Sri Lanka and Nepal, netfood importers, remain vulnerable tochanges in prices of food imports, whileIndia and Pakistan remain susceptible tooil price and supply shocks due to theirrelatively high reliance on importedenergy (see, e.g., ESCAP 2000).

Financial integration

South Asia’s attempts to integrate moreclosely into the world economy haveencompassed not only trade reforms, butliberalisation of the financial sector aswell. The rationale for opening updomestic financial sectors to externalflows lies with the ability of foreigncapital to ease a country’s foreignexchange constraint and increase itscapacity to import, although considerablerisks are attached, such as exposure toexternal volatility and restrictions onmonetary policy. To varying degrees and

South Asia’sattempts to integratemore closely into theworld economy haveencompassed notonly trade reforms,but liberalisation ofthe financial sectoras well


at different times, policy initiatives inSouth Asian countries have, nevertheless,begun to deregulate financial markets,introducing convertibility on the currentand capital accounts, making exchangerates flexible, and liberalising investmentregimes. How financially integrated hasSouth Asia become as a result? And whathave been the trends in external financingto the region in the era of rapidglobalisation?

Level of financial integration

The degree of South Asia’s integrationinto international financial and capitalmarkets can be measured in several ways.One is to measure countries’ ability toattract private external financing, asreflected in the ratio of FDI and portfolioflows to GDP. Another is to examinecountries’ access to international financialmarkets as reflected in their credit ratings.More highly integrated countries generallyhave better ratings, allowing them toborrow at lower rates, for longermaturities, and to access more diversifiedsources of funds. According to thismeasure, the South Asian region hasbecome more financially integrated overthe past decade. Credit ratings, ascompiled by the Institutional Investor,have improved steadily since the early1990s, indicating improved access toexternal sources of finance, although

Pakistan has been the exception, withdeclining ratings starting in the middle ofthe decade (figure 2.3).

In order to judge the level of financialintegration, credit ratings below 20 canbe taken to indicate low access (andtherefore, integration), above 50 highaccess and, in between, medium access(World Bank 1997a). According to thiscriterion, Bangladesh, India, Nepal andSri Lanka have reached a ‘medium’ levelof integration, with India nearing the‘high’ category, while Pakistan hasbecome less integrated in recent years,falling from the ‘medium’ to ‘low’categories (figure 2.3).

Financial integration can also be judgedby the development of new types offinancial markets in the economy. Incountries with a low degree of financialintegration, the development of stockmarkets and other markets is weak, whilein more integrated economies, equitymarkets are well developed and play animportant role in financing. In SouthAsia, stock markets have grown rapidlysince financial sector liberalisation (annextable 16). Capitalisation of stocks in theregion has nearly tripled in value over thelast decade, and doubled as a per cent ofregional GDP. Moreover, the number ofdomestic companies listed on stockexchanges has doubled since the early1990s to more than 7000, greater than inany other developing region.Comparatively, however, financialintegration through stock marketdevelopment in South Asia is stillrelatively underdeveloped, with thecapitalisation of stock markets among thelowest in the developing world, only one-fifth and one-quarter the value of thosefound in East Asia and Latin America,respectively (annex table 16).

Trends in overall resource flows to South Asia

Aggregate net resource flows to SouthAsia have expanded rapidly since financialreforms, rising from an average of US$8.6billion per year during the 1980s toUS$11.9 billion per year during the 1990s

Figure 2.3 Institutional Investors credit ratings, 1980-2000

Source : Institutional Investor, various issues.


India

Pakistan

Nepal

Sri Lanka

Bangladesh

60

50

40

30

20

10

0


(annex table 17). What is significant aboutthis increase has been its changingcomposition. In contrast to the 1970s and1980s, when public funds in the form ofofficial loans were the main source ofexternal finance, private capital flowshave come to dominate these flows overthe past decade. Their share of total netresources rose from less than a thirdduring the 1980s to more than half duringthe 1990s. At their height in 1997, privatecapital flows were three times the valueof official flows. Despite this increase,South Asia’s share of total private capitalto developing countries has declined overthe past decade, falling from 7 per centduring the 1980s to 3 per cent in the1990s (figure 2.4).

Foreign Direct Investment

Over the last decade, the composition ofprivate capital to South Asia has alsochanged markedly. In contrast to the startof the 1990s, when private debt flowscomprised the majority of total privatecapital to the region, non-debt flows cameto form over 70 per cent by the decade’send (annex table 17). A primarycomponent of these non-debt flows hasbeen foreign direct investment (FDI).Empirical evidence has shown that FDIhas a positive impact on the economicgrowth of host countries, more so thanother types of external flows anddomestic investment, as a result ofvarious inter-related factors includingimprovements in productivity, technologytransfer, research and developmentexpansion, and promotion of exports(Blomström et al. 1992). Compared toother types of investments, FDI flowsalso tend to be relatively more stable,typically based on a long-term view ofthe market and growth potential ofrecipient countries, and relatively difficultto disinvest, reducing the risks of sharpreversals during adverse situations. Mostcountries in the region have reformedtheir investment regimes to encouragethese inflows by reducing foreignownership restrictions, domestic-equity

and licensing requirements, andintroducing fiscal and financial incentives.

In response to these measures andowing to improving macroeconomicfundamentals more generally, the flow offoreign direct investment to South Asiancountries has increased over the pastdecade. Most of these flows haveoriginated from either the developedcountries or the newly industrialisedcountries of East and Southeast Asia. TheUnited States and Europe have been themain providers of FDI to India andPakistan during the 1990s, while Japan,Hong Kong, Korea and Malaysia havebeen important for Bangladesh and SriLanka (World Bank 1997a and ESCAP1998a). Their average value increasedten-fold from US$256 million per yearduring the 1980s to US$ 2.1 billion peryear during the 1990s (annex table 18).Annual average growth rates were alsoamong the fastest in the developingworld, increasing from 25 per cent peryear to 31 per cent over the last twodecades, attesting to increasing and rapidfinancial integration. In relative terms,however, the increase in FDI to SouthAsia has been more modest, accountingfor less than half a per cent of regionalGDP during the 1990s, compared to2.7 per cent for East Asia, 1.9 per centfor Latin America, and 1.4 per cent forsub-Saharan Africa (annex table 18).South Asia has also had the lowest ratioof FDI to gross domestic investment,roughly four times less than those foundin East Asia, Latin America and sub-Saharan Africa.

Cross-regional comparisons, moreover,point to South Asia’s stagnating share oftotal FDI to developing countries. Duringthe 1990s, South Asia’s share of theseflows remained less than 2 per cent ofthe developing countries’ total, the lowestamong developing regions (figure 2.5). Incontrast, Central and Eastern Europe,Latin America, the Middle East andNorth Africa, and sub-Saharan Africa allmanaged to increase their shares over thesame period. The distribution of FDIwithin South Asia has also become more

Figure 2.4 Private capital todevelopingcountries

Europe &Central Asia

14%

Middle Eastand North

Africa3%

LatinAmerica &Caribbean

38%

East Asia &Pacific39%

Sub-SaharanAfrica3%

South Asia3%

1990–1999


Africa10%


17%

LatinAmerica &Caribbean

37%

East Asia &Pacific23%

Sub-SaharanAfrica

6%

South Asia7%

1980–1989


Figure 2.5 South Asia’s shareof FDI to developingcountries


12.5%


Africa4.2%

Latin America& Caribbean

46.6%

East Asia &Pacific32.0%

Sub-SaharanAfrica2.9%

South Asia1.8%

1999


4.4%


Africa10.2%

Latin America& Caribbean

33.9%

East Asia &Pacific46.1%

Sub-SaharanAfrica3.5%

South Asia1.9%

1990



concentrated over time. While Indiareceived roughly 40 per cent of total FDIto the region in 1980, its share expandedto more than three-quarters of the total,with the share of other countriesdropping accordingly (figure 2.6).Pakistan’s reduction has been particularlyacute, dropping from 34 per cent in 1980to 14 per cent in 1999.

The sustainability and usefulness ofFDI for a country relates not only to itsaggregate levels, but also to its uses.Given its labour surplus and comparativewage advantage, the kind of FDI mostlikely to bring the strongest benefits tolong-term growth in South Asia is thatassociated with manufacturing (WorldBank 1999a). While the majority offoreign investment funds have in factbeen directed to manufacturing sectors inmost South Asian countries, their shareshave been declining. In 1990, 85 per centof flows in India went to manufacturing,however, in 1995 this figure dropped to59 per cent (World Bank 1997a).Similarly, in Sri Lanka, the share of FDIdirected to manufacturing fell from 60per cent of cumulative FDI from 1978 to1993, to 55 per cent afterwards (WorldBank 1997a). FDI to Pakistan, meanwhile,has increasingly gone to natural resourceexploration, most notably in the oil andenergy sectors, which carries fewerbenefits in terms of new technologies and

human capital improvement (World Bank1997a).

What is also important in assessing thepotential benefits of FDI for hostcountries is the degree to whichinvestment is being allocated to exportsectors. The available informationindicates that a relatively small portion ofFDI has gone to export-oriented sectorsin South Asian countries; most FDI istargeted at industries producing fordomestic markets. In India, for example,textiles, an important source of exportsas well as employment, has attracted lessthan 4 per cent of total FDI in the mid-1990s (annex table 19), while in Sri Lanka,the share of textiles has lost ground toagricultural products and beverages(World Bank 1997a). In Pakistan, by themid-1990s, less than US$100 million hadbeen invested in the Karachi ExportProcessing Zone since its inception in theearly 1980s (World Bank 1997a). Thesetrends strongly contrast the pattern ofFDI use in other regions (e.g., East Asia),and suggest that South Asia may bebenefiting proportionately less from thetrend toward the globalisation ofproduction. The only exception isBangladesh, which has been fairlysuccessful in attracting FDI to its exportprocessing zones, particularly in theready-made garment sector (ESCAP1998a).

Portfolio equity flows

The other major component of privatenon-debt flows to South Asia has beenportfolio equity investments. Eventhough it is widely accepted thatdeveloping nations have benefited frominflows of FDI, the verdict is less clearregarding portfolio flows (Claessens et al .1995). There are clear benefits toportfolio flows and from opening stockmarkets to foreign investors, includingwider access to international capital atlower cost, risk sharing and pricing, andgreater efficiency in the allocation ofcapital. But there are also substantial risks.Portfolio investments are more volatile

Figure 2.6 Distribution of FDI inSouth Asia

Pakistan13.7%

Maldives0.3%

Nepal0.3%

Bangladesh8.4%

Sri Lanka5.3%

1999

India72.0%

Sri Lanka23.2%

Pakistan34.1%

India42.7%

1980

Figure 2.7 FDI and portfolio equity investment to South Asia, 1990-99


7

6

5

4

3

2

1

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Portfolio Equity InvestmentForeign Direct Investment



than FDI, representing short-term assetsthat can be withdrawn quickly from theeconomy. As the liquidity crises in Mexico(1995) and East Asia (1997) have shown,countries with high levels of portfolioinvestment are vulnerable to massiveoutflows of capital when investorsentiments quickly change, leading topossible currency and financial crises.Moreover, the volatility associated withportfolio equity flows also renderscountries more exposed to shocks in theinternational economy, such as changesin the interest rates and stock marketreturns, particularly where capital marketsare small and inflexible, and institutionalframeworks incomplete or inadequate.

Given these risks, the rising share ofportfolio investments in South Asia is asource of concern. Although their amounthas dropped since the East Asianfinancial crisis in 1997, the level ofportfolio equity investment to South Asiaover the last decade had risen fromnegligible amounts to US$6.2 billion attheir peak in 1994, accounting for nearly70 per cent of all private capital flowsthat year (annex table 20). Even thoughtheir share in net private flows hasgenerally averaged less, roughly 30 percent per year during the 1990s, theirvolatility still renders countries in theregion vulnerable to shocks. Since the1990s, there have been two sharpreversals of net portfolio investment, in1995 and 1998, when the value of suchflows dropped by more than 60 and 90per cent of the previous year’s value,respectively. In contrast, FDI to theregion over the same period followed anincreasing trend, with only slightvariations since the East Asia crisis(figure 2.7). India has received the bulkof portfolio equity flows, accounting forUS$4.4 billion alone in 1996, 85 per centof the region’s annual total, reflecting itsmaturing stock market and the presenceof well established corporate names onits exchange. Pakistan, until the mid-1990s received the second largest amount,but has received declining shares sincedue to its worsening macroeconomic

conditions and political instability.Bangladesh and Sri Lanka have receivedsmall shares due to the relatively earlystage of their stock market development.

Prevention of financial crises: Lessons from EastAsia

The record of developing countriesintegration into financial markets over thepast decade suggests that the risk offinancial crisis rises sharply with financialliberalisation and integration. The costsof these crises can be severe, both interms of lost output and social costs.Although considerable debate surroundsthe exact causes precipitating systemiccrisis, there is a general consensus thatthe following factors exercised a role invarying degrees in the 1997 East Asiancrisis: (i) macroeconomic policies thatexacerbated financial risks; (ii) financialsector weakness, particularly weakdomestic bank regulation and supervision;and (iii) short-term capital flows (see, e.g.,ESCAP 1999; World Bank 1999a;UNCTAD 1998). Although financialsector integration in South Asia has yetto reach the level experienced in mostEast Asian economies, rendering the risksof financial crisis and contagion less, it isnone the less instructive to analyse theSouth Asian economies along thesecategories.

(i) Poor macroeconomic policiesappear to have played a considerable rolein leading to financial turmoil in EastAsia. Prior to the crisis, most countries inthe region ran large external and internalimbalances, aggravated by fixed or peggedexchange rates that created adverseincentives to over-borrow and limited theeffectiveness of monetary policy to adjustlarge inflows (ESCAP 1999). In thisrespect, most South Asian countriesappear to be less susceptible, most havinghad improving external balances sincefinancial sector reforms buoyed by strongexport growth as discussed earlier.Moreover, the two largest economies inthe region, India and Pakistan, havemoved to more flexible exchange rates

The risk of financialcrisis rises sharplywith financialliberalisation andintegration


(independent floating and managedfloating, respectively), with othercountries in the region (viz., Bangladesh,Bhutan, Maldives, Sri Lanka) pegged tothe Indian rupee, which may limit someof the boom-bust effects of capital flows(Corbo and Hernandez 1996).

(ii) Weakness in financial and corporatesectors has also been blamed for theonset of crisis. Inadequate supervision orregulation of domestic banking systemsin East Asia created conditions forexcessive risk taking by lenders andborrowers. In particular, loans were notmade on the basis of strict businessstandards, but on so-called ‘cronycapitalism’, with political influencesinterfering with loan allocations. In thisregard, most South Asian countries arestill relatively vulnerable, as banksupervision, accounting standards, andlegal infrastructures remain weak (Nayak1995, and ul Haque and Kardar 1995). InPakistan, for example, financial regulatorybodies have limited autonomy inenforcing regulations, and tend to focuson monitoring compliance with ratiosrather than prudential regulations, suchas conflicts of interests and moral hazard(ul Haque and Kardar 1995). Neverthe-less, the banking sector in most countrieshas not been allowed to fuel largedomestic credit booms, and most haveinstituted regulatory reforms. In Nepal,for example, the government is in theprocess of opening local markets tointernational accounting and auditingfirms (ESCAP 2000).

(iii) Lastly, short-term capital inflowshave also been linked to the financialcrisis in East Asia. Preceding the crisis inmost East Asian countries, there was asurge in volatile short-term capital inflowsin the form of short-term debt andportfolio equity flows, which subse-quently reversed when investors panicked.In this regard, South Asian countries haveexperienced a worsening trend, asportfolio flows during the 1990s haverisen sharply to account for a largeportion of private capital to the region,as described earlier. Nevertheless, the

risks from short-term capital flows inmost countries are still comparatively low.The continued existence of capitalcontrols in most countries has limitedexposure to short-term foreign debt, andthe offshore forward markets forcurrencies in all countries remain thin andhard to use for speculative purposes(World Bank 1999b).

Economic performance duringglobalisation

Given that South Asia has experiencedgreater integration with the worldeconomy, what has been the impact oneconomic performance so far? Closerintegration in the global economy isexpected to lead to faster economicgrowth. Increasing trade and financialopenness theoretically improves acountry’s allocation of resources along itscomparative advantage, exposingpreviously restricted sectors to increasedcompetition, investment and technology,thereby raising long-term growthprospects.

From the record to date, it is unclearwhether greater integration has benefitedgrowth in South Asia. When comparingGDP growth in the region between thetwo periods, growth has, in fact, beenslightly lower during the 1990s than the1980s (table 2.4). The record of growthin individual countries also points to amixed picture. Three countries—Bangladesh, Nepal and Sri Lanka—experienced higher average growth duringthe 1990s than in the earlier period, butanother three—Bhutan, India and theMaldives—had slightly lower rates. India’sgrowth rate has, however, picked upduring 1999-2000, reaching almost 7 percent. Pakistan had the worst record ofall, with growth rates dropping fromamong the highest during the 1980s toamong the lowest in the next decade. Ittherefore, appears that greater economicintegration has yet to translate intosustained growth for a majority ofcountries. It must be kept in mind,however, that many of the benefits of

Greater economicintegration has yetto translate intosustained growth fora majority ofcountries


increased integration may be long-term,and can be expected to surface only witha lag.

• • •

Globalisation has become an increasinglydominant feature over the past decade,as more nations are becoming integratedinto the global economy through tradeand capital flows. South Asian economieshave also begun to participate in theprocess, pursuing market-oriented policiesand reducing barriers to trade andinvestment. Despite rising shares of tradeand capital flows in national income,South Asia remains among the leastintegrated regions in the world. SouthAsia’s exports are still more than seventimes lower on a per capita basis than inEast Asia, and barely account for one percent of the world’s total. Private capitalflows to South Asia are also ten timesless than in East Asia and Latin America,and South Asia’s share of the developingcountries’ total has actually decreasedover the past two decades. Moreover,wide disparities characterise theglobalisation process within the region,as foreign direct investment and portfolioflows have become increasinglyconcentrated in India, with other

Table 2.4 GDP Growth (%)

1980-1984 1985-1989 1990-1994 1995-1998 1980-1989 1990-1998

South Asia 5.7 6.0 4.9 6.0 5.8 5.4Bangladesh 4.9 3.6 4.7 5.2 4.3 4.9Bhutan 7.7 7.4 6.0 6.8 7.5 6.3India 5.6 6.3 4.9 6.6 5.8 6.0Maldives n.a. 8.9 8.6 6.7 8.9 7.7Nepal 3.3 4.9 5.4 4.0 4.1 4.8Pakistan 7.3 6.4 4.7 3.7 6.9 4.2Sri Lanka 5.1 3.2 5.5 5.1 4.1 5.3


countries in the region lagging behind.Although the potential benefits to

greater integration in terms of economicgrowth have yet to surface, the potentialcosts of becoming marginalised from theglobal economy may be great in terms oflost efficiency, technology and growththat globalisation could ultimately bring.If South Asia is to avoid such costs, andtake advantage of the global trendtowards integrated economic activity,reforms must keep apace to sustain tradeand financial integration in the region,while at the same time minimising therisks of greater integration. In the contextof minimising risks, we need to see theimpact of economic reforms during theperiod of globalisation on the people inSouth Asia. The next chapter addressesthis concern.


Annex Tables: On trade and financial statistics

Annex Table 1: Trade to GDP ratios (%)

Nominal level Annual average change PPP-adjusted level Annual average change

1981-89 1990-98 1981-89 1990-98 1981-89 1990-98 1981-89 1990-98

East Asia & Pacific 45.8 60.1 1.0 5.0 14.6 15.9 -2.5 1.4Latin America & Caribbean 26.0 29.0 0.3 2.2 10.9 14.9 -3.7 7.4Middle East & North Africa 60.3 63.1 -2.6 -0.5 30.9 20.7 -10.3 -0.6South Asia 19.4 26.3 0.1 3.6 4.9 4.7 -4.5 1.3

Bangladesh 20.8 25.4 -0.4 6.3 4.9 5.6 -4.1 4.8Bhutana 66.0 75.3 7.9 0.5 28.2 21.5 0.4 -0.6India 14.5 21.9 1.0 4.7 3.8 3.6 -3.9 1.4Maldivesb 100.4 n.a. 8.3 n.a. 29.6 34.9 2.3 0.8Nepal 31.7 49.8 0.9 7.0 5.8 6.6 -2.2 3.9Pakistan 34.3 38.7 -0.2 0.3 11.7 9.1 -5.8 -1.3Sri Lanka 65.9 76.0 -3.2 2.3 13.7 15.7 -6.0 5.5

Sub-Saharan Africa 53.7 56.3 -1.6 1.2 19.7 16.8 -9.0 1.3Low income 26.5 40.3 1.9 5.3 8.9 7.9 -7.1 2.1Worldc 38.0 41.2 -0.4 2.1 22.4 26.3 -3.4 3.4

a: relevant intervals for PPP-adjusted figures are 1990-97b: relevant intervals for PPP-adjusted rates are 1985-89 and 1986-89 for rate of change based on PPP adjusted figuresc: 1990-97


Annex Table 2: Exports of goods and services (% of GDP)

1980-84 1985-89 1990-94 1995-98

East Asia & Pacific 21.5 24.0 27.6 34.1Latin America & Caribbean 13.5 14.7 13.4 15.1Middle East & North Africa 36.0 23.4 31.8 30.1South Asia 7.4 7.6 10.6 12.4

Bangladesh 4.9 5.5 7.9 12.1Bhutan 13.9 23.8 31.0 34.3India 5.9 6.0 8.9 10.8Maldives 20.8 31.8 n.a. n.a.Nepal 11.4 11.5 16.0 24.0Pakistan 11.5 12.6 16.2 15.8Sri Lanka 29.0 25.7 31.7 35.8

Sub-Saharan Africa 26.9 27.5 26.5 29.3Low income 11.7 13.0 18.7 21.8World 19.5 18.7 20.0 22.1



Annex Table 3: Exports of goods and services (annual % growth)

1980-89 1990-98

East Asia & Pacific 10.1 12.5Latin America & Caribbean 5.3 8.1South Asia 6.3 10.0

Bangladesh 7.0 15.7Bhutan n.a. n.a.India 5.3 11.1Maldives n.a. n.a.Nepal 3.9 15.1Pakistan 10.7 5.4Sri Lanka 6.3 8.4

Sub-Saharan Africa 1.5 4.0Low incomea 6.0 10.6Worldb 4.9 6.8

a:1982-89 b: 1990-97

Source: World Bank, World Development Indicators CD-ROM, 2000.

Annex Table 4: Real effective exchange rates (1990=100)

1990 1991 1992 1993 1994 1995 1996

Bangladesh 100 98.2 92.3 91.6 88.3 86.0 85.7India 100 85.2 71.9 71.4 73.9 71.3 70.0Nepal 100 90.5 88.6 84.3 84.6 79.7 80.6Pakistan 100 98.1 96.8 96.5 94.3 93.6 91.8Sri Lanka 100 104.8 104.5 106.2 106.5 101.4 110.2

Source: World Bank 1997a.

Annex Table 5: Share of world’s exports (% of total)

1980-84 1985-89 1990-94 1995-97

East Asia & Pacific 3.8 4.9 6.6 8.6Latin America & Caribbean 3.8 3.9 3.9 4.2South Asia 0.6 0.6 0.8 0.9Sub-Saharan Africa 2.1 1.8 1.6 1.5Other 89.7 88.7 87.2 84.8



Annex Table 6: Structure of merchandise exports

Food Agricultural Raw Fuels Ores and Metals ManufacturesMaterials

(% total) (% total) (% total) (% total) (% total)

1980 1998 1980 1998 1980 1998 1980 1998 1980 1998

East Asia & Pacific 18.2 6.4 12.3 1.8 16.4 5.4 6.8 2.1 44.8 82.4Latin America & Caribbean 32.3 25.4 4.3 2.9 31.1 12.8 12.3 9.1 19.7 49.2Middle East & North Africa 3.2 4.1e 1.2 0.6e 87.4 76.0e 3.0 2.3e 6.1 16.9e

South Asia 28.0 15.5f 10.0 2.2f 2.8 1.0f 5.1 2.1f 53.8 77.6f

Bangladesh 12.0 7.0 19.0 2.0 0.0 0.0 0.0 0 68.0 91.0Bhutan 92.0 23d 1.0 8.0d n.a. 26.0d 0a 3d 4.0 40.0d

India 28.0 18f 5.0 2f 0.0 1.0f 7.0 3f 59.0 74.0f

Maldives 84.0 n.a. 5.0 n.a. 1.0 n.a 2.0 n.a. 9.0 n.a.Nepal 21.0 10f 48.0 1.0f n.a. n.a 0.0 0f 30.0 77.0f

Pakistan 24.0 14.0 20.0 2.0 7.0 0.0 0.0 0 48.0 84.0Sri Lanka 47.0 21d 18.0 4.0d 15.0 0d 1.0 1d 19.0 73d

Sub-Saharan Africa 22.3 n.a. 6.2 n.a. 26.5 n.a 8.6 n.a. 12.3 20.1c

Low income 16.3b 9.2 n.a. 1.9 32.5b 6.2 2.8b 2.5 39.0b 76.7World 12.5 8.1 4.4 1.9 10.9 4.4 4.8 3.0 65.9 79.6

a: 1981; b: 1984; c: 1991; d: 1994; e: 1996; f: 1997


Annex Table 7: Service exports (current US$ billion)

Average Average Average Average Average Average

1980-84 1985-89 1990-94 1995-98 1980-89 1990-98

East Asia & Pacific 11.9 21.2 46.9 96.7 16.6 69.1Latin America & Caribbean 16.4 20.1 32.7 44.4 18.3 37.9Middle East & North Africa 15.0 15.0 22.4 28.4 15.0 25.1South Asia 4.5 5.4 8.2 13.7 5.0 10.6

Bangladesh 0.2 0.2 0.5 0.7 0.2 0.6Bhutan 0.0 0.0 0.0 0.0 0.0 0.0India 3.1 3.7 5.1 9.4 3.4 7.0Maldives 0.1 0.1 0.1 0.3 0.1 0.2Nepal 0.2 0.2 0.3 0.7 0.2 0.5Pakistan 0.7 0.9 1.5 1.8 0.8 1.6Sri Lanka 0.3 0.3 0.6 0.8 0.3 0.7

Sub-Saharan Africa 8.0 7.9 11.5 14.4 8.0 12.8Low income 12.1 15.8 28.8 52.3 14.4 39.3World 394.5 560.7 963.1 1,326.5 477.6 1,124.6



Annex Table 8: Average workers’ remittances per year (US$ million)

1980-84 1985-89 1990-94 1995-98 1980-89 1990-98

East Asia & Pacific 56 90 129 319 73 214Latin America & Caribbean 145 282 691 1,170 213 904Middle East & North Africa 557 668 1,119 1,159 612 1,137South Asia 558 558 725 1,389 558 1,020

Bangladesh 41 60 88 135 50 109Bhutan 0 0 0 0 0 0India 254 234 410 1,000 244 672Maldives 0 0 0 0 0 0Nepal 4 6 6 10 5 8Pakistan 234 225 165 156 229 161Sri Lanka 25 34 55 89 29 70

Sub-Saharan Africa 74 84 105 202 79 149Low income 641 643 935 1,878 642 1,354


Annex Table 9: Direction of exports (% of total), 1980, 1986 and 1998

Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

USA 1986 32.2 n.a. 27.7 n.a. 23.2 12.4 30.41998 35.8 n.a. 20.9 33.7 25.9 21.6 38.3

European 1986 29.8 n.a. 27.8 n.a. 28.5 37.2 30.11998 45.7 n.a. 26.5 23.5 33.1 30.7 29.4

Japan 1986 10.1 n.a. 14.6 n.a. 1.0 12.3 7.21998 1.7 n.a. 5.1 9.2 0.7 3.4 4.7

East Asia and Pacific 1986 6.6 n.a. 8.7 n.a. 3.8 12.8 6.21998 4.4 n.a. 15.4 13.3 0.2 14.7 5.3

East Europe 1980 8.0 n.a. 20.3 n.a. 20.5 3.8 4.21998 1.3 n.a. 3.9 1.0 0.2 2.1 3.2

Developing Countries 1980 56.2 n.a. 30.1 n.a. 32.6 59.1 42.61998 13.1 n.a. 41.6 3.16 36.9 39.9 21.3

Industrial Countries 1980 35.8 n.a. 49.2 n.a. 46.9 37.1 41.71998 86.4 n.a. 56.5 68.4 61.3 60.1 76.0

Source: World Bank 1997a; UNCTAD 1999b; IMF 1999.


Annex Table 10: Intra-regional trade

Share of intra-regional trade Share of intra-regional Share of intra-regionalin total exports (%) imports in total imports (%) trade in total trade (%)

1990 1995 1998 1990 1995 1998 1990 1995 1998

Bangladesh 3.6 2.7 2.7 6.8 17.7 17.5 5.8 12.8 12.4India 2.7 5.1 5.6 0.4 0.6 1.1 1.4 2.7 3.2Maldives 25a 22.0 17.3 14.1 a 13.2 9.2 16.0 a 14.3 10.7Nepal 6.9 9.3 36.5 11.5 17.5 31.7 10.0 15.0 32.8Pakistan 4.0 3.3 4.9 1.6 1.5 2.4 2.6 2.2 3.6Sri Lanka 3.3 2.7 2.5 6.8 11.4 12.0 5.3 7.5 8.1South Asia 3.1 4.4 5.3 1.8 3.8 4.8 2.4 4.1 5.0

Memo Items

East Asia 33.3 41.6 41.4b 32.6 37.9 39.3b 32.9 39.7 40.4b

Sub-Saharan Africa 8.0 11.5 11.3b 9.3 11.7 13.0b 8.6 11.6 12.2b

NAFTA 41.4 46.2 47.3b 33.9 38.4 39.7b 37.2 41.9 43.2b

a: 1992; b: 1996.

Source: IMF 1999; World Bank 1997a.

Annex Table 11: Bilateral export flows among South Asian countries (% of total exports)

To Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

From

Bangladesh 1990 .. .. 1.32 .. 0.42 1.38 0.481998 .. .. 1.44 .. 0.47 0.76 0.03

India 1990 1.67 0.01 a .. 0.04 a 0.22 0.24 0.571998 2.83 0.03 .. 0.02 0.88 0.37 1.45

Maldives 1992 0 .. .. .. .. 0 251998 1.02 .. .. .. .. 1.08 16.33

Nepal 1990 0.46 .. 6.48 .. .. 1.56 b 01998 6.17 .. 32.88 .. .. 0.23 1.13

Pakistan 1990 1.84 0.01 a 0.88 0.12 a 0.02 .. 1.241998 1.27 0.01 2.4 0.02 0.09 .. 1.13

Sri Lanka 1990 0.53 .. 1.06 0.36 a 0.04 a 1.69 ..1998 0.14 .. 1.04 0.64 0.05 0.70 ..

a: 1992; b: 1991

Source: IMF 1999.


Annex Table 12: Bilateral import flows among South Asian countries (% of total imports)

To Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

From

Bangladesh 1990 .. 0.11 a 4.65 .. 0.05 1.91 0.221998 .. 0.07 16.12 .. 0.19 1 0.08

India 1990 0.06 0.01 b .. .. 0.06 0.19 0.091998 0.15 0.03 .. .. 0.34 0.5 0.1

Maldives 1992 .. .. 7.33 .. .. 0.52 6.281998 .. .. 1.62 .. .. 0.46 7.16

Nepal 1990 1.76 .. 9.47 .. .. 0.22 0.21 a

1998 0.42 .. 30.68 .. .. 0.42 0.14

Pakistan 1990 0.51 0.02 a 0.62 .. 0.04 a .. 0.51998 0.39 0.02 c 1.65 .. 0.01 .. 0.37

Sri Lanka 1990 0.34 .. 4.48 0.26 a 0.69 a 1.93 ..1998 0.02 .. 9.94 0.27 0.08 1.66 ..

a: 1992; b: 1994; c: 1995

Source: IMF 1999.

Annex Table 13: Trade balance (% of GDP)

1980-84 1985-89 1990-94 1995-98 1980-89 1990-98

East Asia & Pacific -1.1 0.7 -0.1 2.0 -0.2 0.8Latin America & Caribbean 1.0 3.1 0.0 -1.6 2.1 -0.7Middle East & North Africa 1.2 -5.7 -2.5 1.1 -2.2 -0.9South Asia -4.9 -4.3 -3.0 -4.1 -4.6 -3.5

Bangladesh -11.6 -9.0 -5.5 -6.3 -10.3 -5.9Bhutan -29.2 -24.1 -11.8 -8.3 -26.7 -10.3India -2.6 -2.6 -1.7 -3.2 -2.6 -2.4Maldives -49.8 -41.0 n.a. n.a. -45.4 n.a.Nepal -8.2 -9.2 -9.9 -11.6 -8.7 -10.7Pakistan -11.4 -9.4 -7.0 -6.2 -10.4 -6.7Sri Lanka -15.7 -10.9 -9.7 -8.2 -13.3 -9.1

Sub-Saharan Africa -2.1 1.6 -0.4 -1.3 -0.2 -0.8Low income -1.1 -2.3 -0.3 0.0 -1.7 -0.2World -0.2 0.2 0.2 0.4 0.0 0.3



Annex Table 14: Average export and import growth (%)

1980-89 1990-98

Exports Imports Exports Imports

East Asia & Pacific 10.1 9.2 12.5 10.1Latin America & Caribbean 5.3 1.4 8.1 12.1Middle East & North Africa n.a. n.a. n.a. n.a.South Asia 6.3 5.1 10.0 9.0

Bangladesh 7.0 6.7 15.7 12.5Bhutan n.a. n.a. n.a. n.a.India 5.3 6.9 11.1 10.5Maldives n.a. n.a. n.a. n.a.Nepal 3.9 7.3 15.1 10.8Pakistan 10.7 1.4 5.4 2.9Sri Lanka 6.3 3.0 8.4 8.6

Sub-Saharan Africa 1.5 -0.1 4.0 4.1Low income 6.0 5.0 10.6 8.9World 4.9 4.7 6.8 6.2


Annex Table 15: Current account balance (% of GDP)

1980-84 1985-89 1990-94 1995-98 1980-89 1990-98

Bangladesh -3.6 -4.3 -2.7 -2.3 -3.9 -2.5Bhutan -42.3 -31.8 -14.3 -12.0 -36.5 -13.3India -1.1 -1.9 -1.1 -1.4 -1.5 -1.2Maldives -40.2 3.7 -7.7 -6.5 -18.2 -7.2Nepal -4.6 -6.5 -7.2 -9.4 -5.5 -8.2Pakistan -2.6 -2.8 -3.6 -4.7 -2.7 -4.0Sri Lanka -9.4 -6.0 -5.0 -3.8 -7.7 -4.5



Annex Table 16: Stock market indicators

Market capitalisation Market capitalisation Value of trade Number of listed(billion US$) (% of GDP) (% of GDP) domestic companies

1990 1999 1990 1998 1990 1998 1990 1998

East Asia & Pacific 197.1 536.9 21.3 33.0 13.3 30.3 1,443 3,702Latin America & Caribbean 78.5 402.9 7.6 20.8 2.1 10.7 1,748 2,166Middle East & North Africa 5.3 113.9 29.0 26.6 1.5 5.8 817 1,619South Asia 42.7 113.6 10.6 20.4 5.5 13.4 3,231 7,178

Bangladesh 0.3 1.0 1.1 2.4 0.0 1.9 134 208India 38.6 105.2 11.9 24.5 6.8 15.0 2,435 5,860Nepal 0.3 0.3 6.5 5.6 0.3 0.1 72 104Pakistan 2.8 5.4 7.1 8.5 0.6 14.4 487 773Sri Lanka 0.9 1.7 11.4 10.9 0.5 1.8 175 233

Sub-Saharan Africa 142.6 183.1 52.0 80.3 3.8 26.3 1,011 1,117Low income 54.6 375.6 7.5 22.2 3.1 22.1 3,446 9,089World 9,398.4 27,459.0 51.2 97.4 28.4 81.3 25,424 47,465


Annex Table 17: Aggregate net long-term resource flows, South Asia (US$ billion)

Annual average Annual average

1980-89 1990-99

Aggregate net resource flows 8.6 11.9Total public flows 5.9 5.8

Official grants 2.4 2.5Official loans 3.4 3.3

Bilateral 1.1 1.3Multilateral 2.3 2.1

Total private flows 2.7 6.1Private debt flows 2.4 1.8

Bonds 1.7 0.5Commerical banks 0.2 0.4Others 0.4 0.0Non-guaranteed loans n.a. 0.8

Private non-debt flows 0 4.3Foreign direct investment 0 2.3Portfolio equity investment 0 2.0

Source: World Bank 1997a, 2000a.


Annex Table 18: Foreign direct investment

US$ million % of GDP % of Gross Domestic Average annualInvestment growth in value (%)

Average Average Average Average Average Average Average Average

1980-89 1990-98 1980-89 1990-98 1980-89 1990-98 1980-89 1990-98

East Asia & Pacific 3966.8 41326.5 0.67 2.67 2.15 7.52 26.9 26.2Latin America & Caribbean 5714.0 31714.0 0.71 1.86 3.31 8.76 9.3 31.0Middle East & North Africa 806.2 3365.3 0.38 0.74 1.53 3.85 150.1 -210.1South Asia 256.2 2151.4 0.08 0.44 0.38 1.92 25.0 31.3Bangladesh 0.7 55.3 0.00 0.13 0.02 0.62 -44.9 378.4India 104.7 1424.3 0.04 0.37 0.19 1.58 85.0 57.1Maldives 1.6 7.8 1.57 3.28 n.a. n.a. 18.5 12.4Nepal 0.5 9.7 0.02 0.22 0.08 0.97 -20.0 80.7Pakistan 107.9 501.7 0.33 0.88 1.76 4.72 27.0 13.9Sri Lanka 40.7 152.7 0.75 1.22 2.81 4.93 -0.5 64.6Sub-Saharan Africa 1101.5 3279.3 0.74 1.44 5.24 8.32 373.9 20.4Low income 2942.9 36048.0 0.34 2.36 1.33 7.85 56.6 31.2World 84620.9 295419.0 0.67 1.16 2.93 4.59 19.4 15.8

Source: World Bank 1997a, 2000a.

Annex Table 19: Top ten industries in India receiving FDI approval between August 1991 and June 1995

Industry Amount % Share

Fuels 99,601.85 28.39Chemicals 29,314.09 8.36Service sector 868.74 7.66Metallurgical 25,802.64 7.36Electric equipment 22,799.82 6.50Telecommunications 22,418.23 6.39Food processing 20,912.99 5.96Transportation 18,407,078 5.25Hotel & Tourism 17,710.87 4.90Textiles 13,710.87 3.91



Annex Table 20: Portfolio equity flows (US$ billion)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

All developing countries 2.76 7.55 14.06 51.02 35.16 36.06 49.17 30.19 15.57 27.59South Asia 0.11 0.02 0.38 2.03 6.22 2.34 5.20 2.48 0.35 1.09

Bangladesh 0.00 0.00 0.00 0.00 0.05 0.03 0.03 0.01 0.00 n.a.Bhutan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a.India 0.11 0.00 0.24 1.84 4.73 1.52 4.40 2.12 0.34 n.a.Maldives 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a.Nepal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a.Pakistan 0.00 0.02 0.14 0.19 1.34 0.73 0.70 0.25 0.00 n.a.Sri Lanka 0.00 0.00 0.00 0.00 0.11 0.06 0.07 0.10 0.01 n.a.

Sub-Saharan Africa 0.00 0.00 0.14 0.17 0.86 4.87 2.01 1.51 0.68 0.49East Asia & Pacific 1.57 1.05 5.10 20.65 12.61 18.27 18.09 9.19 9.01 18.97Latin America & Caribbean 0.90 6.23 8.23 27.19 13.16 7.64 13.89 9.95 1.75 3.59Middle East and North Africa 0.00 0.00 0.00 0.00 0.11 0.20 1.63 2.26 0.88 0.61Europe and Central Asia 0.19 0.23 -0.18 0.98 2.20 2.73 8.35 4.81 2.90 2.84



BLANK

44

Social Impact of Globalisation in South Asia 45

3Social Impact of Globalisation

in South Asia

Economic growth is (like) a wildhorse; it needs to be trained to servethe real interests of society. If thehorse misbehaves in some societies,leading to deprivation of manyhuman lives, then the fault is notthat of the horse but the skill of therider. Economic growth is essentialin poor societies—but even moreimportant is its structure anddistribution.

– Mahbub ul Haq


Globalisation affects developed anddeveloping countries differently. Whilethe developed-country worries focus onthe protection of their domestic industriesand agriculture, particularly if it involvesthe cost-reducing measures by shiftingproduction processes abroad, thedeveloping countries contend withincreased poverty, vulnerability,inequalities and inequities generated bythe globalisation process on the poorersections of their population. An equitableglobalisation process requires theintegration of the financial, trade andinvestment policies with those of socialdevelopment in order to improve thequality of life of the whole population,instead of only a minority.

In theory, higher growth rates wouldgenerate sufficient revenue for the stateto reduce poverty and income inequality.But there is no automatic link betweenthe increase in growth rates andreduction of income inequality. This linkbetween growth and distribution has tobe created consciously by progressivefiscal policy to redistribute income andsocial policy to improve education,health, employment and other socialneeds.

It is in this context that there is a needto assess the impact of globalisation onhuman development, particularly in SouthAsia, the region with the highest absolutenumber of poor people in the world. Asthe founder of the human developmentmodel, Mahbub ul Haq, asserted, ‘Humandevelopment is the process of enlargingpeople’s choices’. While globalisationincreases the choices of goods andservices and alters consumer preferences,human development enlarges people’schoices by expanding human capabilitiesand opportunities so that the majority ofpeople in poor countries can have access

to resources needed for a decent standardof living.

Globalisation creates opportunities butit also increases risks. The financialturmoil in East Asia in 1997-99demonstrated the inherent risks of globalfinancial markets. The negative socialimpacts in East Asia, including risingunemployment, rising prices, decliningreal wages and rising social unrest, weresevere and continued long after theeconomic recovery.

There is very little hard data availableto establish a causal connection betweenglobalisation and increased socialdeprivation. But it cannot be denied thatthe relentless pressures of globalisation,including the stabilisation and structuraladjustment programmes of the IMF andthe World Bank, and the new tradingregime of the WTO, lead to fiscalcompression, tariff reductions andcutbacks of public provisioning of socialservices. In the 1990s, the tax/GDP ratiohad declined in most developingcountries. But in South Asia, the alreadylow tax/GDP ratio had declined furtherfrom 12.9 per cent in 1988 to 9 per centin 1999. These have led to stagnant ordecelerating allocation to social services.

Globalisation in South Asia

The globalisation process in South Asiawas initiated to accelerate economicgrowth through enhanced internal andexternal competition, privatisation andtrade liberalisation. It included measuresto reduce domestic credit expansion ingeneral and fiscal deficit in governmentexpenditure in particular. It was assumedthat the surplus generated fromexpenditure compression would reducethe balance of payments deficits. Further,reduction of public expenditure was

An equitableglobalisation processrequires theintegration of thefinancial, trade andinvestment policieswith those of socialdevelopment

Chapter 3

Social Impact of Globalisation inSouth Asia


considered to be a means to divertresources towards a relatively moreproductive private sector. The WorldBank/IMF package of stabilisation-cum-structural adjustment programmes aimedat correcting the imbalances at the macroand micro levels and put the economy onto a higher economic growth path.

After over a decade of implementingeconomic reforms, an assessment of theglobalisation process in South Asia is avery relevant and useful exercise not onlyfor the region but also for otherdeveloping countries which have and/orare going to initiate the process ofreforms. But we must insert a cautionarynote here. In order to make anassessment of the impact of globalisationon human development in South Asia,we must consider the initial conditions,prior to globalisation, in these countries.If the initial conditions were of highhuman deprivations, as they were inSouth Asia mainly because of thegovernments’ lack of commitment tohuman development, inefficiency ofadministration of public sectors and poorgovernance, then the globalisationprocess may have only exacerbated thealready poor human development recordsof these countries.

In the pre-globalisation period, theregion was characterised by highpopulation growth rates, high levels ofilliteracy, poor health attainments,pervasive poverty and inequitabledistribution of income and assets.However, there were considerabledifferences within and between SouthAsian countries in their performance insocial and economic development priorto and during the globalisation phase. Thefinal assessment of globalisation on thepeople in South Asia has to be made onthe basis of these initial conditions.

The average growth rate of South Asiaduring 1980-89 was 5.8 per cent(see table 2.4). However, during 1990-98,the South Asian average growth rate hadgone down to 5.4 per cent, althoughIndia’s growth rate reached almost 7 percent during the period, and Pakistan

recorded the lowest growth rate of4.2 per cent. Further, the composition oftotal income generated in the region wasmainly from non-agricultural activities.Although the relative proportion ofincome and output generated fromindustrial and service sector activitiesincreased, the agricultural sectorcontinued to be a predominant source ofemployment. The growth of income andemployment in the industrial sector wassluggish and at lower levels during theglobalisation period. Thus most SouthAsian countries were experiencing aprocess of incomplete structuraltransformation.

In 1990, while Sri Lanka was amongthe medium human developmentcountries, Bangladesh, India, Pakistan andNepal were among the low humandevelopment countries in the world. By1999, Sri Lanka and India were amongthe medium human developmentcountries, while Pakistan, Bangladesh andNepal continued to remain as low humandevelopment countries. Compared to theinitial conditions in these countries, therewas considerable improvement inincreasing life expectancy and improvingliteracy rates. However, the nature ofsocial and economic development in allthe countries of the region had not beensufficient to reduce poverty or to makeany meaningful difference in the lives ofthe majority of the population.

To make anassessment of theimpact ofglobalisation onhuman developmentin South Asia, wemust consider theinitial conditions,prior to globalisation

80

70

60

50

40

30

20

10

0

1960199019971999

Figure 3.1 Life expectancy (years) in South Asia: 1960-1999


Source: UNDP 1991, 1999, 2000; MHHDC 1999.


Figures 3.1 and 3.2 show the progressachieved since 1960 in improving the lifeexpectancy and literacy in five SouthAsian countries. But this progress hadslowed in 1997 and 1998/99. Most of theSouth Asian countries failed to maintaina balance between economic and socialdevelopment indicators during the periodof globalisation.

Poverty and inequality

In 1995, out of 1.3 billion poor people inthe world, 515 million lived in South Asia.The head count ratio (HCR), measuredas a percentage of population whose

income or consumption level falls belowthe poverty line, continued to remain athigh levels, though at varying rates.Between 1989-94, while income povertywas as low as 4 per cent in Sri Lanka and11 per cent in Pakistan, it ranged between29-53 per cent in Bangladesh, India andNepal. An analysis of the incidence ofpoverty across two time points viz.,1989-94 and 1994-98, indicated that it hadincreased in three out of five South Asiancountries in the second half of the 1990s(UNDP 2000) (see figure 3.3).

The available information on the depthof poverty measured by the poverty gapindex (PGI), and severity in terms ofFoster-Greer-Thorbecke (FGT) indexacross South Asia points towards anoverall decline in poverty during theperiod 1985-86 to 1990-91. However, thedisparities in the rates of reduction ofpoverty between rural and urban areaspersisted. For instance,• In Sri Lanka while the depth andseverity of poverty declined at thenational level, they increased in urbanareas and declined in rural areas (SouthAsia Poverty Monitor 1997b).• In India, as per national poverty line,the HCR, PGI and FGT declined in bothrural and urban areas, but at differentialrates. The declines of head count ratio,the depth and severity were faster in theurban areas as compared to the ruralareas. The coefficient of variation in theincidence of income poverty in 16 majorstates in India had increased from 0.40 in1973-74 to 0.67 in 1993-94, pointingtowards rising inter-state disparities.Additionally, poverty levels varied acrosssocial groups as well and remained at highrates (Mahendra Dev 2000).• In Bangladesh, the head count ratio, thedepth and severity of poverty hadincreased not only at national level but atthe regional level as well. The magnitudeof increase was considerably higher in therural areas as compared to the urban areas.• In Pakistan between 1986-87 and1993-94, the head count ratio, the depthand severity of poverty had increased (seetable 3.1).

100

90

80

70

60

50

40

30

20

10

0

1970198519971998

Figure 3.2 Adult literacy (%) in South Asia: 1970-1998


Source: UNDP 1991, 1999, 2000; MHHDC 1999, 2001.

Figure 3.3 Population below income of $1 per day (%)in South Asia: 1989-98

Source: UNDP 1991, 2000.

60

50

40

30

20

10

0Bangladesh India Nepal Pakistan Sri Lanka

1989-94

1994-98


The income distribution across variouseconomic groups had worsened. Between1987-98 the richest 20 per cent ofpopulation had between 41 to 46 per centof income while the poorest 20 per centhad less than one-tenth of the totalincome (see table 3.2).

Human poverty in South Asia

The human poverty index (HPI),conceptualised by Mahbub ul Haq andsubsequently developed and constructedby UNDP in the Human DevelopmentReports (UNDP 1996, 1997), attemptedto broaden the concept of poverty inorder to capture the deprivations insurvival, education and income. In SouthAsia, the imbalance between social andeconomic development in the 1990s hadled to insignificant improvements in thehuman poverty levels of the region. In1999, the percentage of population notexpected to survive to age 40 years was37 in India, 35 in Pakistan, 41 inBangladesh, 42 in Nepal, 26 in Sri Lanka,38 in Bhutan and 35 per cent in Maldives(see table at the end of this report). In1999 about half the total adult populationin the region was illiterate. There werelarge differences between countries andwithin each country. While the rate ofilliteracy in Sri Lanka was the lowest at 9

per cent, Nepal continues to have thehighest number of illiterate population at60 per cent. Public provisioning of basicservices such as health, sanitation andchild nutrition influences the quality ofpublic health. There are majorinadequacies of such provisions in theform of poor coverage and utilisation inthe region. For example,• There had been improvements in theprovisioning of safe drinking water inmost South Asian countries from 77 percent coverage in 1995 to 89 per cent in2000. All the countries had madesignificant improvements in theprovisioning of safe drinking water.• In 1995, over one-fifth of thepopulation in the region did not haveaccess to any health services. Except SriLanka and India, provisioning of healthservices had remained inadequate in otherSouth Asian countries ranging between25 per cent in Maldives to 55 per cent inBangladesh.

Table 3.2 Percentage share of real per capita GDP (1987-98)in South Asia


Poorest 20% 8.7 8.1 7.6 9.5 8.0Richest 20% 42.8 46.1 44.8 41.1 42.8Richest 20% topoorest 20% 4.9 5.7 5.9 6.9 5.4

Source : UNDP 1991, 1999, 2000.

Table 3.1 Nature of poverty in selected South Asian countries(per cent)

Year Region Sri Lanka Year India

HCR PGI FGT HCR PGI FGT1985/86 Rural 31.62 7.67 2.75 1983 49.02 0.14 0.05

Urban 16.43 3.48 1.11 38.33 0.10 0.04Total 27.33 6.54 2.31 n.a n.a n.a

1990/91 Rural 24.41 5.27 1.78 1993/94 39.65 0.09 0.03Urban 18.32 4.14 1.57 30.65 0.08 0.03Total 22.36 4.82 1.62 n.a n.a n.a

Bangladesh Pakistan

1985/86 Rural 45.90 10.90 5.90 1986-87 28.1 20.2 1.7Urban 30.80 7.30 2.50 28.8 21.2 1.9Total 43.90 10.40 3.50 28.6 20.6 1.8

1991/92 Rural 52.90 14.60 5.60 1993-94 37.7 27.5 4.2Urban 33.60 8.40 2.80 29.9 24.1 2.8Total 49.70 13.60 5.10 35.7 27.9 4.1

Note: HCR indicates head count ratio; PGI indicates poverty gap index; FGT indicates Foster-Greer-Thorbecke index.Source : South Asian Poverty Monitor 1997a, 1997b; Ravallion and Sen 1996, A Profile of Poverty in Pakistan HDC 1999.


• Public provisioning of sanitationfacilities had been poor in South Asia. In2000, 63 per cent of the total populationin the region did not have access tosanitation facilities. This deprivation wasas high as 73 per cent in Nepal and 69per cent in India.

• In 1990-98, 51 per cent of the childrenunder five years were malnourished. Thisnumber remained stagnant in Bangladesh,India and Pakistan, and fluctuated in SriLanka and Nepal around 38-56 per cent.The survival and development of childrencontinues to be a daunting problem inthe era of globalisation (see box 3.1).

A number of studies suggest that duringthe most recent decades, when policiesof globalisation have been implementedby a growing number of countries invarious degrees , income distribution,globally and in most countries, hasworsened, and as a result is having adampening impact on long-termeconomic growth trends—and on theprospects for poverty reductionnecessary to meet the UN MillenniumDeclaration Goal of halving the numberof people living in extreme incomepoverty.

Extreme income poverty affectedsome 1.2 billion people at the end ofthe twentieth century, similar to thenumber a decade earlier. UNICEFestimates that children make up abouthalf of the income poor. An assessmentof progress towards the achievement ofthe social goals for children, agreed atthe World Summit for Children inSeptember 1990, suggests that overallprogress has been less than anticipated.Recent research2 suggests that despitedecline in the global and most nationalaverage trends for under-5 mortalityrates, the improvement in somecountries is due to declines among therichest quintile, while progress amongthe poorest 40 per cent is falling behind.This phenomenon is particularlyapparent among countries with lowerlevels of child mortality rates. There isevidence to suggest that public policiesare crucial to narrowing the gap byensuring that access to quality basicsocial services is universal.

The global annual resourcerequirement to fund these services of$80 billion has not been met. Countrystudies suggest that developingcountries on average allocate some

Box 3.1 Globalisation and the children1

12-14 per cent of their budgets to thesesub-sectors, while the donorcommunity allocates some 11 per centof ODA to these.

The trade aspects of globalisation alsoalter the context of many issues andareas affecting children, in some casesintensifying problems and in other casesaffecting the policy actions required toaddress the problems. For example, byincreasing employment opportunities forunskilled and semi-skilled workersglobalisation changes the demand forchild labour, although the net effect inthis area is not yet clear. Increasingemployment of women, andenhancement of their opportunities insociety, accentuates the importance ofchild-care policies within an overallframework for child development.

Foreign direct investment and trans-national corporations have broughtwith them employment opportunities,capital and trade, and broadened thedomestic supply of (international)goods and services. While some haveseriously undercut domestic productionof goods and services, others havebrought risks to the health statusparticularly of women and children.This applies particularly to the cases ofmarketing breast-milk substitutes andtobacco. The International Code hascontributed to reversing the trend awayfrom breastfeeding but is still oftenviolated. Similarly, advances in bio-technology have greatly expanded theopportunities to prevent and treat childillness through vaccines and medicinesbut requires public-private partnershipsto ensure that these benefits reach thepoorest children.

A comparative study3 of responsesto the South East Asian financial crisis

in 1997 shows that as governments inMalaysia, Korea and Thailandcontinued to prioritise socialdevelopment some adverse effects onchildren were contained. The crisis wasprimarily transmitted to childrenthrough household employment andreal income changes. In the worstaffected countries, Indonesia andThailand, the situation of childrenappears to have deteriorated. Childabuse appeared to have worsened.Several millions of children, who wereseverely malnourished even before thecrisis, were neglected. As families faceddifficulties and stress arising fromeconomic hardships, drug abuse andrelated problems increased. The crisisconfirmed that without pre-existingmechanisms of reaching the populationwith social protection measures,emergency assistance often failed, orwas slow, to reach those for whom itwas intended.

The globalisation package embeds aperception that the public sector shouldbe contained to reduce the fiscal strainon the economy. But the same packagepotentially lessens revenue generatedfrom trade by the reduction of tradetariffs and taxes and other measures toattract foreign investment.

– contributed by UNICEF

1 The panel draws on Cornia ‘Globalisation,inequality, growth and child poverty’ mimeo andother background papers for the UNICEFbooklet on ‘Harnessing Globalisation forChildren’, which will be published in time for theSpecial Session on Children, September 2001.2 Minujin and Delamonica ‘Social disparities, childmortality and globalisation’ mimeo.3 Abeysegera and Kittiprapas ‘Financial Instabilityand Child Wellbeing: A Comparative Study ofSocial Policy Responses in Asian Crisis-AffectedCountries’ mimeo.

Sources: Khan and Mahmood 2000.


Education

In the 1990s, over 40 per cent of childrendid not reach grade 5 (see table 3.3).Between 1995-99, this proportion rangedbetween 30 per cent in Bangladesh to 56per cent in Nepal. It was the lowest in SriLanka at 3 per cent.

In 1970, secondary enrolment rateswere the highest in Sri Lanka at 47 percent, while Nepal had the lowestenrolment rate at 10 per cent. By 1996-97,while there had been improvements inthe overall enrolment rates in the region,Bangladesh recorded the lowest gross aswell as net enrolment at the secondarylevel. In 1992, tertiary enrolment rates inthe natural and applied sciencesaccounted for 26 per cent of the totaltertiary enrolment. These rates werehighest in Sri Lanka at 34 per cent,followed by India, Bangladesh and Nepal.Between 1995-97 these rates declined inmost South Asian countries and rangedbetween 14-29 per cent.

An inter-temporal examination of themean years of schooling displays minorimprovements in educational outcomesbetween 1980 and 1992. In 1998, theregion continued to have mean years ofschooling as low as 2.4 years indicatingless than primary level education with theonly exception of Sri Lanka where it wasmuch higher at 7.2 years. Whileglobalisation process demands bettereducated and skilled labour, the overalllevels of education and skill-trainingcontinued to remain low.

Further, there was also a sharp genderdisparity in the mean years of schoolingattained by male and female students. In1998, mean years of schooling for boysin Bangladesh, India, Pakistan and Nepalranged between 2.9-3.5 years, while thosefor girls were lower ranging between0.9-1.2 years. Thus, while boys camecloser to completing primary education,girls failed to complete even two years ofschooling. In contrast, boys in Sri Lankahad an average of 8 years of schoolingwhile girls completed 6 years ofschooling. Moreover, the teacher-pupil

ratio in 1986-88 ranged between 32-60students per teacher. In 1995, the ratiodeteriorated in three out of five countriesviz., Bangladesh, India and Pakistan(UNDP 1991, MHHDC 1999).

Health

Since the 1970s, in most South Asiancountries notable improvements hadtaken place on some of the healthindicators, mainly as a result of large-scalegovernment programmes. But the healthstatus of the vast majority of populationcontinued to remain very poor. Between1990-97, the proportion of low birthweight babies was 32 per cent in theregion, with Bangladesh having thehighest rate at 50 per cent. The maternalmortality rate per 100,000 live births,between 1990-98, was estimated to bearound 480, with the highest rate inNepal at 540 per 100,000 live births(see figure 3.4).

Despite efforts by the governmentsand the private sector to improve theoverall health status of the population,incidence of old diseases like tuberculosis(TB) and malaria continued to remainvery high. In 1996, the region had thesecond highest, after sub-Saharan Africa,

Table 3.3 Profile of education in South Asia(per cent)

Year Bangladesh India Nepal Pakistan Sri Lanka South Asia

1. Children not reaching grade 5 (%)1990-95 53 38 48 52 2 411992-95 – 41 – – 17 381995-99 30 48 56 50 3 46

2. Secondary enrolment1970a – 26 10 13 47 251986-88b 17 41 30 19 71 –1996a 19 49 38 26 75 441997c 22 60 55 – 76 –

3. Combined enrolment at all levels (%)1980 30 40 28 19 58 371995 37 55 56 41 67 521998 36 54 61 43 66 51

4. Tertiary natural & applied science enrolment (% of total tertiary enrolment)1992 25 26 17d – 34 261995-97 – 25 14 – 29 22

Note: aindicates gross enrolment rates, bindicates net enrolment rates, cis per cent of relevantage group, ddata provided pertains to 1993.

Source : UNDP 1991, 2000; MHHDC 1999.


TB cases of 107 per 100,000 population.The estimates for 1997 revealed that thisrate had declined to 94 per 100,000population. In Pakistan, pulmonarytuberculosis in adults continued to be amajor public health problem, acuterespiratory tract infections were common,and malaria continued to be a big threat.Since 1995, the number of malaria casesreported in Sri Lanka increased from 786per 100,000 population to 1196 in 1997.

Social sector services are theresponsibility of the states/provinces inIndia and Pakistan, yet in 1998 asubstantial proportion of the populationin these two countries was not able toaccess health services. Although mostSouth Asian countries have adopted amixed approach of public and private-sector participation in providingeducation and health, the ratio of socialsector personnel to population continuesto remain inadequate minimising theeffectiveness of the provisioning.

The increase of HIV/AIDS casesposes a challenge for the health plannersas well as service providers. In 1997, totalAIDS cases, aged 0-49 years, were 4.1million in South Asia of which 97 percent cases were reported in India. Evenwithin India, great disparities existedacross different regions. Three-quarters ofAIDS cases in India were in threestates—the states of Maharashtra, TamilNadu and Manipur (Maniar 2000). TheWorld Health Organization has estimatedthat in South Asia children account for 4per cent of all HIV cases.

Rapid proliferation of HIV/AIDS hasbeen attributed to the globalisationprocess, which has increased the rate ofglobal labour migration at inter-regional,

intra-regional and international levels.Other reasons cited for the rise of theepidemic are low levels of literacy thatlead to low awareness amongst thepotential risk groups, increase of drugaddicts, unsafe blood transfusion andreproductive tract infection amongst menand women. In Bangladesh, Sri Lanka andPakistan, separate National AIDSCommittees with multidisciplinary andmulti-sectoral representatives have beencreated. The respective nationalgovernments and the committees jointlyundertake measures such as surveillanceof health services, blood safety measuresand education awareness programmes.They are implemented in coordinationwith the help of non-governmentalorganisations and international donoragencies. But in India, analysts argue, thatdespite alarming statistics of AIDS/HIVcases, the government response has sofar not been adequate to the challengesfaced by the country (Jain et al . 2000).

Employment

In this era of globalisation and marketliberalisation, there has been a trend tomove away from large enterprises, stableworkforces and wage systems towardsflexible production processes, and flexibleemployment and payments. Flexibility ofemployment has spread across thedeveloping, transitional and industrialisedcountries. While national governmentshave created the space for various formsof flexibility by controlling labour unions,and introducing labour legislation andregulations to promote flexibility, firmshave increased their control by relyinglargely on contracted employment. Globallabour flexibility has become pervasive asit is advocated as a means to lowerunemployment, raise economic growth,improve incomes and reduce inequality(Standing 1999).

A critical facet of the new labourmarket is the extent of informalisationand casualisation of employment. InSouth Asia, more women are also joiningthe labour force, especially in the

1000

800

600

400

200

0Bangladesh India Pakistan Nepal Sri Lanka

1980-87

1990-98

Figure 3.4 Maternal mortality rate (per 100,000 live births)


A critical facet ofthe new labourmarket is the extentof informalisationand casualisation ofemployment


informal sector (see box 3.3). In India,the proportion of workforce formallycovered by legal protection (minimumlabour standards) is not more than10 per cent, while informal sectoractivities accounted for 90 per cent ofemployment. Even within non-agricultural employment, the pro-portionate share of informal sectoreconomic activities has increased.

With globalisation and increasingcompetition, demand for skilled and semi-skilled workers has increased. Theeducational attainments of the labourforce govern the extent of adaptability ofthe labour force to changed marketdemand. But in South Asia, due to theprevalence of high illiteracy rates and lowlevels of educational attainments thequality of labour force continued toremain relatively poor in two out of threecountries (see table 3.4).

In the 1990s, the structure ofemployment in the region had shiftedtowards self-employment and own-account enterprises. Only 30 per cent ofthe total workers were in the category ofwage and salaried workers, andemployers. These shares had fluctuatedin Bangladesh, India and Pakistan around12 per cent, 30 per cent and 32 per cent,

Globalisation affects women fromdifferent walks of life differently.Urban, educated and relatively affluentwomen benefit from the increasedopportunities for work that come withthe influx of foreign companies andinvestments. These employmentavenues are complemented by greateropportunities to receive education andskills training of a higher quality. Thenew technologies that define this era,in particular the computer and internet,are accessible primarily to this group ofwomen. In general, the liberalisation oftrade and financial markets also promisebenefits for this group, including agreater variety of goods at cheaperprices due to increased competition,and much more attractive interest ratesfor women entrepreneurs to undertakebusiness ventures.

Conversely, poor, uneducated, credit-constrained, informal and agriculturesector women—by far the majority ofwomen in South Asia—are supposed tobenefit in a much less direct manner.These women are supposed to benefitfrom long-term economic growth

Box 3.2 Globalisation and the women

brought about by correcting pricedistortions in factor and productmarkets. By making markets competitive,higher agricultural growth is expectedand this in turn is expected to increaserural income. It is also expected that theexpansion of the industrial sector wouldincrease employment in the urban as wellas rural areas. The proponents ofglobalisation argue that the process mayentail some short-term difficulties interms of reduced income andconsumption; unemployment might alsoincrease. But eventually the reformprocess would lead to greater gains allaround.

But the efforts to becomecompetitive often hurt the social sectorsfirst. It is most often these sectors thatface budgetary reductions whenliberalisation policies are implemented.Conservative monetary and fiscalpolicies are often undertaken and thesetoo, independent of reductions in thesize and scope of social sectors, canindirectly reduce allocations to socialservices and basic provisions. Such cutsin social spending are likely to hit the

poor rural women the hardest, whoalready have such limited access toeducation and health facilities.

It is true that significantopportunities have become available forwomen in low-technology manu-facturing industries such as textiles andgarments. In Bangladesh, the overallparticipation of women in the economyhas increased considerably, and in thelow-skilled manufacturing sectorwomen’s wages are almost equal tothose for men. But even in these newavenues of employment, womengenerally get stuck at the lower rung,with long hours, poor workingconditions and little job security. Themost exploited are the home-basedwomen workers.

The gains of globalisation have sofar accrued to those who already haveeducation and skill advantage, easiermarket access and possession of assetsfor use as collateral to access credit. Forthe poor women of South Asia,globalisation has been associated withrising prices, loss of job security, lackof healthcare and rising social tension.

Sources: Khan and Mahmood 2000.

Table 3.4 Educational attainments of the employed(per cent)

Country/Gender Illiterate Literate upto Middle Secondary & above Graduate &primary school but below graduate above

1. India- Total 49.2 24.0 11.5 7.3 8.0Male 37.2 28.2 14.6 9.6 10.3

Female 74.3 15.0 4.9 2.7 3.72. Pakistan- Total 56.8 17.8 8.5 13.2 3.7

Male 53.5 19.3 9.5 14.1 3.7Female 80.8 7.1 1.5 7.0 3.6

3. Sri Lanka- Total 6.9 21.3 45.4 17.5 8.8Male 4.3 21.2 49.6 17.7 7.2

Female 13.0 21.5 35.8 17.2 12.6

Source : Anant et al . 1999.


respectively. The proportionate shares ofself-employment and own-accountenterprises in Bangladesh and Pakistanwere 60 per cent and 66 per cent. Casualemployment in India had increased from68 per cent in 1983 to 70 per cent in1993-94. Own-account enterprises hademerged as an important source ofemployment during the period, thuspointing towards growing informalisationof economic activities and growingcasualisation of labour force (ILO 1999).Globalisation has pushed the real wagerates downwards both in the formal andinformal sector, though at different rates.Two distinct features emerge in terms ofthe impact of globalisation on real wagesin South Asia:• First, in Sri Lanka between 1980-90and 1990-93, the formal sector with 60per cent of employment had experiencednegative growth rates of real wages whilethe growth rates of wages in theunorganised sector increased at an annualrate from 0.53 per cent to 2.83 per cent(Anant et al . 1999).• Second, Bangladesh, India andPakistan, with predominantly informalsector workers, experienced rising realwages ranging between 2 to 11 per centin the pre-globalisation period. However,the growth rates in the formal sector werelower at 2 per cent to 7 per cent. In theglobalisation phase, increasing labourflexibility and dismantling of labourmarket institutions caused deceleration ofreal wages in both formal and informalsector. In Bangladesh, real wages declinedin the formal sector at an annual rate of

3.9 per cent, and in the informal sectorby 0.28 per cent in 1986-90 and furtherto 0.83 per cent in the 1990s (Rahmanand Sen 1997). Trends in India were quitedifferent. While formal sector real wagesincreased at an annual rate of 0.86 percent in the globalisation phase, wages inthe informal sector declined at an annualrate of 2.53 per cent. In Pakistan, realwages in the formal sector increased at adiminishing rate of 1.14 per cent and theinformal sector wages fell by one per centper annum (Anant et al . 1999).

Thus, lower labour flexibility in SriLanka pulled wage rates down in theorganised sector, mainly due to fiscalcompression. However, the wagedifferentials between the organised andunorganised sector minimised. In otherSouth Asian countries, dismantling oflabour institutions increased employmentinsecurities, reduced real wage rates andwidened wage gaps between the formaland informal sector.

Rising labour costs also lead to lay-offof redundant labour, which is governedby the structure of employment. Sri Lankawith a predominant formal sectoremployment had been facing the problemof growing youth unemployment at therate of 14 per cent in 1990-92 whichdeclined to 13 per cent in 1994 (UNDP1999; MHHDC 1999). In 1993, India,Bangladesh, Pakistan and Nepal werefacing the problem of unemployment andunderemployment of 22, 13 and 43 percent, respectively (ILO 1993).

Clearly, in critical areas such asimproving the capability of the poorthrough better access to education andhealth and expanding their opportunitiesthrough improved access to jobs and realwages, the situation has worsened duringthe globalisation phase in South Asia.Although the incidence of incomepoverty had declined in the region,inequalities had increased within eachcountry. While the extent of illiteracy hasdeclined, there is still a huge backlog ofout-of-school children. Also, malnutritionamong the children continued to remaina daunting problem for most countries in

196019861993-961995-97

Figure 3.5 Public education expenditure (as a % of GNP)


4

3.5

3

2.5

2

1.5

1

0.5


Although theincidence of incomepoverty had declinedin the region,inequalities hadincreased withineach country


the region. Additionally, deprivation interms of accessibility of publicprovisioning of basic health servicescontinued to be neglected in the region.

Social development policies inSouth Asia

In the 1990s, all South Asian countriesmade commitments at the UN con-ferences in Jomtien (education), Cairo(population), Copenhagen (socialdevelopment), and Beijing (women) todevelop and implement policies andprogrammes for social development.Thus the social sector policies at thecentral and state/provincial levels weredeveloped in accordance with the globalgoals and national aspirations. Increasedallocations were one of the imperativesto implement these goals. Yet, if we lookat only two sectors—education andhealth—we see that public expenditureas a percentage of GNP has in fact gonedown in almost all countries during1995-97. However in the context of Indiaand Pakistan, social sector expendituresare funded mostly out of state/provincialbudgets, and thus are not fully reflectedin central budgets (see figure 3.5).

In 1960, public education expenditurewas 2 per cent of South Asia’s GrossNational Product (GNP), in the 1990s itcontinued to remain low, at less than3.5 per cent. In terms of the share ofeducation in total public expenditureduring 1995-97, it was less than 12 percent. This proportion varied across theregion with the highest in Nepal at14 per cent and the lowest at 7 per centin Pakistan.

Globalisation is driven by knowledgeand new technology. Thus there is a neednot only to provide good quality primary,secondary and technical education butalso to spend more on higher level ofprofessional education. But in South Asiaa trend of declining or stagnant tertiaryenrolment rates is emerging. The relativeallocations to higher education need tobe selectively enhanced to upgrade thelevel and quality of education. A

facilitative role of the state is veryimportant here to make the private sectorplay an important part in providing high-quality professional/technical education.

Thus it seems that in the globalisationphase most South Asian countriescontinued to either reduce or maintainthe already low levels of educationexpenditure, despite poor educationaloutcomes and growing demand forquality labour force. This had led to thedeterioration of public provisioningcausing poor enrolment rates as well aslow attainment rates. Similarly, none ofthe South Asian countries had adaptedthe education to meet the growingdemands of globalisation throughincreased allocations for higher education.

In the health sector, the alreadynegligible proportionate share of healthexpenditure in GDP had increased at adecelerating rate in South Asia over thepast three decades. In 1960, healthexpenditure in the region was as low as0.5 per cent of GDP, which increasedinsignificantly to 0.9 per cent in 1996-98.In Bangladesh, the proportionate shareof health expenditure had been risingfrom 0.8 per cent in 1990 to 1.6 per centbetween 1996-98. In India, the proportionof health expenditure in GDP had beenfluctuating at extremely low levels of lessthan one per cent over the past threedecades. The expenditures on healthsector had increased in Nepal from 0.2per cent in 1960 to 1.3 between 1996-98.Sri Lanka, with health achievementsequivalent to the East Asian countries,had been reducing health expenditures

1960199019951996-98

Figure 3.6 Proportion of health expenditure in GDPin South Asia: 1960-1998


2.5

2

1.5

1

0.5


South Asiancountries continuedto either reduce ormaintain the alreadylow levels ofeducationexpenditure


from 2 per cent of GDP in 1960 to1.4 per cent in the late 1990s. Althoughpublic health expenditures in Pakistan hadbeen less than one per cent of GDP, percapita health expenditures had been risingover the past 15 years, with expendituresfrom the private sector accounting for2 to 3 per cent of GDP (Ghaffar et al.2000a).

Poverty alleviation programmes

South Asian countries, characterised bypervasive poverty, have beenimplementing several poverty alleviationprogrammes over the past decades. Theseprogrammes have been in the form ofself-employment creation (SEC) or assetbuilding programmes, and wageemployment creation (WEC)programmes. These programmes weremainly targeted towards the poor or verypoor families on the basis of incomethreshold. However, a feature of mostprogrammes is that they are financed bythe state and, as such, periodic fundinginadequacies often lead to eitherabandonment or reduced effectiveness ofthe schemes. However, with the onset ofglobalisation the resource allocations tothese programmes in real terms have beendeclining.

The impact of the programmes variedacross South Asia reflecting the differentapproaches of the governments. In SriLanka, direct poverty alleviationprogrammes included land redistributionin pre-globalisation period. In the post1977 period direct wage-employment andasset-generation programmes wereimplemented. A specific direct povertyalleviation programme, the JanasaviyaProgramme was launched in 1989. Themain objective was to enhance humandevelopment through upgrading skills andinvestment, and economic rehabilitationof the ‘very’ poor families. The SamurdhiProgramme replaced the JanasaviyaProgramme in 1994 as income-supportand economic rehabilitation programme.The programme is implemented bythousands of youth at village level who

are required to work alongside divisionaland village level administration staffalready in place (Sri Lanka Poverty Report1997).

In Bangladesh in 1996, an estimated20 different poverty alleviationprogrammes were implemented. Food-based wage employment programmes andmicrocredit-based self-employmentprogrammes broadly constitute thepoverty alleviation measures in thecountry. The targeted groups for theformer programmes are mainly landlessrural poor who seek seasonal wageemployment and receive training for skilldevelopments (ILO-SAAT, 1997). Theseprogrammes include the Test Relief (TR),Food for Work (FFW), Vulnerable GroupDevelopment Programme (VGDP) andRural Maintenance Programme (RMP).TR and FFW beneficiaries receive foodaids instead of cash payment in lieu ofmaintenance and/or construction of ruralinfrastructure. Most FFW programmescreate seasonal employment. FFWprogramme has been transformed into amulti-sectoral development project calledRural Development Project (RDP),currently being implemented by fiveministries and more than 60 NGOs.

Since the 1970s, the Grameen Bankhas been leading the micro-creditprogrammes, with a goal to empower therural poor and alleviate poverty. Theseprogrammes are targeted towards thelandless poor, particularly women. During1990-94, the total number of beneficiariesacross various credit programmes,implemented both by the government andNGOs, increased at the rate of 25 percent per annum, while creditdisbursements increased by 151 per centper annum (Rahman and Sen 1997). TheNGOs, each having their own targetgroups, dominated the credit programmesin Bangladesh.

In India, poverty alleviationprogrammes included self-employmentprogrammes for poor households/persons such as the Integrated RuralDevelopment Programme (IRDP) andTraining for Youth for Self-employment

With the onset ofglobalisation theresource allocationsto the povertyalleviationprogrammes in realterms have beendeclining


(TRYSEM) and Development of Womenand Children in Rural Areas (DWCRA).The wage employment programmes wereJawahar Rozgar Yojana (JRY),Employment Assurance Scheme (EAS) inrural areas, while Prime Minister’s RozgarYojana (PMRY), Nehru Rozgar Yojana(NRY) and Prime Minister’s IntegratedUrban Eradication Programme(PMIUEP) were implemented in theurban areas.

The IRDP was initiated in 1978-79 toenable poor families in rural areas to crossthe poverty line by providing productiveassets and inputs, financial assistance inthe form of subsidies from thegovernment and term-credit fromfinancial institution. In April 1995, IRDP,TRYSEM, DWCRA and supply ofimproved toolkits for rural artisans andGanga Kalyan Yojana were merged toconstitute the Swarna Jayanti GramSwarojgar Yojana (SGSY), which wasintended to function as a single self-employment programme. It had majorfeatures of all the schemes and theobjective was focused on povertyalleviation, capitalising on the advantagesof group lending, and overcomingproblems of multiplicity of programmes.

The JRY programme, the principalnational wage employment scheme, wasthe outcome of the merger of theNational Rural Employment Programme(NREP) and the Rural LandlessEmployment Guarantee Programme(RLEGP), initiated in 1989. The mainobjective was to generate additionalgainful employment through creation ofrural physical infrastructure. Over theperiod 1980-95, a total amount of Rs.317.2 billion was disbursed to the ruraleconomy through IRDP and WECs,covering a cumulative total of 47 millionpoor families. However, there had beenan overall decline in the coverage ofpoverty alleviation programmes in theglobalisation era.

In Pakistan, reducing poverty hasalways been a declared policy in alldevelopment plans. As most of the poorlived in rural areas, rural development was

considered as essential for any povertyalleviation programme. The first attemptat this was the setting up of VillageAgricultural and Industrial Development(Village AID) programme in 1953, whichwas replaced by Rural Works Programme(RWP) in 1962 with a view to stabilisefood prices and create employment at thesame time. Later, the Integrated RuralDevelopment Programme (IRDP) waslaunched to improve the socio-economicconditions of rural masses.

During the period of structuraladjustment, direct poverty alleviationprogrammes were essential to hold thepoverty line, as well as to provide socialsafety nets for the vulnerable. However,these programmes could find only alimited space in the steeply declininggovernment expenditures. During thisperiod, the most important povertyalleviation programmes was the SocialAction Programme started in 1992-93. Inaddition, there were also programmes,primarily based on politicalconsiderations, such as Junejo’s FivePoint Programme, Benazir’s People’sProgramme, and Nawaz Sharif’s Tameer-i-Watan—all implemented by thepoliticians without a clear sense ofpriority or effectiveness. Other measuresincluded self-employment schemes likeYouth Investment Promotion Society(YIPS) and Prime Minister’s Selfemployment Scheme to provide smallloans. Social safety nets included Zakat,Ushr and Baitul-Mal, and a limited foodstamp programme. The total expendituresof these programmes were no more thanhalf a per cent of GDP.

The inadequate and ineffective publicprogrammes for the poor in Pakistan hadleft a large space for the NGOs to initiatesome successful programmes for socialdevelopment and poverty alleviation. TheAga Khan Rural Support Programme andOrangi Pilot Project are two examples ofhow communities in Pakistan are gettingtogether to solve their problems.Recently, a renewed focus of thegovernment to reduce poverty has seenthe revival of the old food stamp


programme, and the setting up of amicro-credit bank (Khushali Bank) and aPoverty Alleviation Fund.

Social protection programmes

The social protection that a countryprovides for its citizens through a seriesof measures against the economic andsocial distress resulting from sickness anddeath of an income-earner, unemploy-ment and old age, etc., is the backboneof the modern welfare state. In this eraof globalisation, job and incomeinsecurity are increasing, especially forwomen and other vulnerable groups whoare dependent on informal and casualwork without any provisions for socialprotection. In South Asia, where about80-90 per cent of the labour force is inthe informal sector, they are mostlyoutside the existing social protectionschemes that cover only the formalsector.

Sri Lanka is the only South Asiancountry with a formal sector labour forceof over 60 per cent, so the social securityprogrammes in Sri Lanka such as pension,provident funds, and life insuranceschemes cover the majority of theworkforce. But in Bangladesh, India,Pakistan and Nepal where the majority ofthe workforce depends on the informalsector, social security system covers onlyabout 10 per cent of the population. Thepoverty alleviation programmes aredesigned to provide social assistance tothe poor, but due to the rising budgetarycuts, inefficiency and high costs of servicedelivery even these programmes are notbeing effective in protecting the needy.

To summarise, the social servicesexpenditure in the post-globalisationperiod stagnated at the prevailing pre-reform levels. The ratios of expenditureswere higher in Sri Lanka as compared toother countries. The South Asiancountries are implementing the fiscalcompression policy without restructuringthe patterns of expenditure. Thus, evenin the 1990s, while on the one handexpenditures on social services were being

reduced, overall public expenditurecontinued to be high due to non-development expenditure. The cut-backsof expenditures also reduced theeffectiveness of service delivery.

Conclusions

During the globalisation period in 1990s,demographic transition was faster withimproved life expectancies and decliningdeath rates of population. The structureof the population had a growing share ofthe aged population. The composition ofthe population indicated persistent genderdisparities with females constituting lessthan 50 per cent of the total population.Such disparities were particularly sharp inlow human development countries andpersisted in terms of education, health,nutrition, and employment opportunities.

The already poor social attainmentsremained at lower levels during theglobalisation period. While in Sri Lanka,mean years of schooling improved fromseven years of schooling in early 1970 toeight years in the 1990s, the average inother South Asian countries were as lowas less than primary level education inboth periods. With globalisation thedemand for highly skilled and specialisedlabour force increased, however none ofthe countries mobilised or providedadditional resources to the tertiaryeducation sector.

The region has been facing dualchallenges posed by infectious diseases aswell as increasing burden of non-communicable diseases or lifestylediseases. The countries are also subjectedto increased cases of TB, malaria andHIV/AIDS. Over one-fifth of thepopulation in the region did not haveaccess to health care services. Overallhealth expenditures were reduced tolevels that were lower than those in thepre-reform periods in most countries.

Inefficient provisioning coupled withleakages in expenditures led todeteriorating quality of services. Thus,there has been a trend of risingproportion of drop-out rates at the

Inefficientprovisioning coupledwith leakages inexpenditures led todeteriorating qualityof services


primary education level, decliningprovision of public health facilities,disproportionate population and healthpersonnel ratio, and poor off-take of foodgrain provisions from the publicdistribution system. Improvements inhuman development indicators duringthis period were very slow, largely due tothe social policies implemented in the pre-globalisation period.

Bulk of the labour force in Bangladesh,India, Pakistan, and Nepal wascharacterised by high illiteracy and lowereducational attainments. Such attainmentsrestricted the entry of such labour intoformal sector employment, and led to risein the movement towards informal sectoractivities that included casualemployment, self-employment, ownaccount enterprises and unpaid familywork. The informal sector wage rates inthese countries were lower than theformal sector wages. Hence, we observethe trend of rising underemployment ratesin these countries rather thanunemployment.

In Sri Lanka, on the other hand, betterliteracy levels maintained the formalsector employment opportunities. Theproportionate share of public sectoremployment in total formal sectoremployment was far higher than privatesector employment. The fiscalcompression during the globalisationperiod reduced employment opportunitiesin the sector. In the process,unemployment rates reached staggeringheights of 14 per cent.

While incidence of poverty declinedboth in terms of depth and severity, interand intra regional disparities persisted.Income distribution was skewed towardshigher income groups. While, on the onehand growing marginalisation of landholdings led to rising agricultural labour,on the other hand, poor agricultural wagerates led to migration of labourers tourban areas in search of non-agriculturalemployment. But the freezing of formalsector employment opportunities led to arise in unemployment rates, as in SriLanka, and resort to informal sector

activities, as in other South Asiancountries.

Rising investments from transnationalcorporations, as well as rising domesticcompetition, increased reliance on flexibleproduction processes that changedemployment patterns drastically. Risingsub-contracting and growing casualisationof labour reduced the share of formalsector employment.

The resource crunch during this periodled to cut-backs of expenditures of assetcreation and wage employmentprogrammes that were initiated as a directpoverty alleviation measure. However,better targeting in Sri Lanka andinvolvement of NGOs in Bangladeshprovided safety-nets to the poor.

The social security provisions availableto the working population also decreasedwith changing employment structure.Since bulk of the workforce inBangladesh, India, Pakistan and Nepal areemployed in the informal sector, formalsector social security measures did notreach this population. The coverage ofthese schemes was better in Sri Lankabecause of sizeable proportion of formalsector workforce. The income security inthe country was also maintained due tothe presence of traditional labour marketinstitutions that regulate levels of wagerates. Thus, the majority of work force inSri Lanka was covered by income,employment as well as social security. ButBangladesh, India, Nepal and Pakistanhad fewer social protection provisions.

Social policy in the region prior to theglobalisation process was pro-poor thataimed at raising growth levels throughequitable distribution of assets andincome. During the reform period thesocial policy largely driven by a growth-mediated process had led to inequitabledistribution of assets and income. Therole of government was transformedfrom a provider to a facilitator. The SriLankan experience in this context isparticularly relevant. In the pre-1977period the government policy was in-builtwith egalitarian ethos that aimed at raisinghuman capabilities through investment in

The resource crunchled to cut-backs ofexpenditures of assetcreation and wageemploymentprogrammes thatwere initiated as adirect povertyalleviation measure


basic education and public health. Thisenabled the country to achieve highhuman development levels. In the post-liberalisation period, human developmentoutcomes in the country remained aroundthe pre-reforms levels, pointing towardsa lack of continued commitment forraising social development in the country.Bangladesh and India on the other hand,had been implementing a plethora ofprogrammes that were administered byseveral ministries, departments andagencies, thus, raising administrative costsof the programmes. In the reform period,

fiscal cuts were directed towards reducingdevelopment expenditures rather than theadministrative expenditure, by integratingthe programmes to a unified scheme.Globalisation was thus characterised bysocial policies that were not sensitive topeople’s needs and concerns.

The assessment of the economicreform policies initiated in the region tofacilitate the globalisation process andtheir impact on growth and humandevelopment are discussed in the nextchapter.

Economic Reforms and Globalisation: Country Case Studies 61

4Economic Reforms and

Globalisation: Country CaseStudies

While policy-makers must acceptthe logic of the marketplace, theymust also turn around and makemarkets work more efficiently in theinterest of all people. It is people-friendly markets that are needed.

– Mahbub ul Haq


Introduction

The disappointing outcomes of theeconomic and social development policiesin South Asian countries since theirindependence are evident from the lowlevels of per capita income, low humandevelopment indicators, high levels offiscal and current account deficits, andpervasive poverty. All major countries inthe region had adopted an inward-lookingimport substitution policy for industrialdevelopment. The state became thedominant player in all economic activities.

The trade and foreign exchangemanagement policies were designed toprovide incentives for rapid industrialgrowth. The scarcity of foreign exchangeand food shortages had in due courseforced a review of the earlier policies. Anattempt was made to improve incentivesfor both the agricultural sector andexport. For agricultural development,policies were focused on providing ruralinfrastructure, high yielding seeds,chemical fertilisers and irrigation facilities.As a result, major breakthroughs inagriculture were achieved in India,Pakistan and Bangladesh. Selectiveincentives were also provided for thepromotion of exports of manufacturedgoods. However, the industrial sector,which had initially registered a highgrowth rate, did not sustain its growthmomentum. The import substitutionstrategy had, however, helped in layingthe foundation for industrialisation interms of both skill development andproduction of goods for the domesticmarket. But the strategy did not succeedin accessing the world market. South Asiahad missed out on the export expansionof manufactured goods during the pastfew decades when the world exportmarkets for such goods were growing.

East Asia and China were the mainbeneficiaries by opening up theireconomies—domestically as well asinternationally. Their successes were seenas opportunities that could be exploitedif the economies were to open up toworld markets and global competition.

South Asian countries started theprocess of rapid integration into theworld economy in the 1990s, exceptSri Lanka which had started in the 1970s.The forces determining the architectureof the reform programmes are many andhave played themselves out in a complexmanner in different countries of SouthAsia. The need for integration arose outof the realisation of the opportunities forexporting labour-intensive manufacturedgoods. Access to scarce foreign exchangeand advanced technology furtherunderscored the rationale for opening upto world capital and technology markets.

The reform measures implementedfocused on reducing trade barriers,achieving macroeconomic stability,increasing the role of the market andenhancing private sector participation ina wide variety of activities, includingsocial sector. In view of the differencesin the initial conditions in differenteconomies, it was expected that therewould need to be some differences in thedesign, content and management of thereform programmes. Most reformprogrammes were initiated and supportedby the IMF, World Bank and the AsianDevelopment Bank.

There are many commonalties as wellas differences in the implementation ofreform programmes. The early attemptsin each of the countries were piecemealand had limited impact. The decade ofthe 1990s represented a turning point forreforms in the case of all countries. Therewas a consensus reached by the early

Reform measuresimplemented focusedon reducing tradebarriers, achievingmacroeconomicstability, increasingthe role of themarket andenhancing privatesector participation

Chapter 4

Economic Reforms and Globalisation:Country Case Studies


1990s that reforms were needed foraccelerating growth. All countries hadturned to donors for financial andtechnical assistance in support of reforms.There was also political support fromwithin the countries for reforms. Indiahad managed to evolve a stable politicalconsensus on the need and type ofreforms. Sri Lanka had solved thesustainability issue for reforms due to itslonger experience beginning in 1977.Pakistan, Nepal and Bangladesh had anindifferent record in terms ofimplementation of reforms despitewidespread agreement on the need forreform. Changes in governments hadinvariably affected the extent ofimplementation of reforms in thesecountries.

Stabilisation and structural adjustmentprogrammes, often supported by theWorld Bank and IMF, had aimed atreducing high fiscal and current accountdeficits, making the economy work moreefficiently through macro economicreforms and to integrate the economy tothe world economic forces. Thegovernance issues were of criticalimportance to the outcome of reforms.Political instability often impeded theimplementation of reforms anddetermined the outcome of reforms.Substantial insecurity in the region, mainlydue to political differences between Indiaand Pakistan, had resulted in a largeburden of defence expenditure in bothPakistan and India. Civil strife inSri Lanka, Nepal and Bangladesh had alsobeen detrimental to the developmentprospects of the countries. High security-related expenditures often squeezed thedevelopment expenditures, includingexpenditures on social sectors.

The impact of reforms on growth hasgenerally been positive for all countriesin South Asia except Pakistan, wheregrowth has decelerated to about two-thirds of what it was in the pre-reformera. External trade orientation hasincreased only mildly in all countries.Fiscal deficits have remained high,especially in Pakistan, Sri Lanka and

Nepal. India has reduced its currentaccount imbalance considerably, butdeterioration has been seen in most othercountries. Despite an acceleration ingrowth, excepting Pakistan, poverty hasnot been reduced significantly due toworsening distribution of income. In thecase of Pakistan, the number of people inpoverty has doubled during the 1990s.

This chapter examines the reformprogrammes undertaken in India, Pakistan,Nepal, Bangladesh and Sri Lanka. Itoutlines how these programmes relate tothe ongoing world-wide globalisation aswell as domestic liberalisation processes.In each country, we briefly examine themain features of the reform process andassess their impact on growth,employment and poverty.

India1

Until at least the 1970s, the Indianeconomy was seen as a classic case ofpostwar state-led economic development,within a mixed-economy framework. Thisapproach incorporated the majortendencies of Indian economic planning,including the emphasis on heavyindustrial investment until the mid 1960sand the focus on state ownership/controlof the ‘commanding heights’ of theeconomy (the basic and coreinfrastructure industries as well as otherstrategic and economically significantindustries), as well as state regulation ofmany other aspects of economic activityeven in the non-core areas. It also meantrecognition of the role played in thesubsequent decades of Indiandevelopment, by the state in subsidisingprivate investment activity in bothindustry and agriculture.

Over four decades, this broad mixedeconomy approach brought about somesignificant if qualified economicsuccesses, as well as glaring failures. Themore striking successes were in terms ofthe substantial increase in aggregate

The impact ofreforms on growthhas generally beenpositive for allcountries in SouthAsia except Pakistan

1 This is an abridged version of the paper prepared byJayati Ghosh.


growth rates over the pre-Independenceperiod, as well as the steadydiversification of the economy and thebuilding up of a substantial productivebase in a range of modern industry. Themost striking failures were in thepersistence of absolute material povertyamong a very large section of thepopulation (such that even at presentmore than 30 per cent of the populationis officially described as below the povertyline) and in the inability to achieve basichuman development goals such aseducation and adequate health provisionfor the entire population.

The basic elements of the changedeconomic regime since 1991 haveincluded a system of more liberal importsand reduction/elimination of externaltrade controls generally; a progressiveremoval of administrative controls overcapacity creation, production and prices,including a move to free markets infoodgrains and a cutting down of foodsubsidies; a strictly limited (and declining)role for public investment even inimportant infrastructure sectors, theprivatisation of publicly-owned assetsover a wide field; a focus on reducingimplicit subsidies by raising user chargesover a wide range of public utilities andservices; an invitation to MNCs toundertake investments (under subs-tantially liberalised conditions relating toownership, operation and profitrepatriation); and financial liberalisationmeasures that have substantially reducedpriority sector lending and subsidisedcredit and allowed greater capital marketinnovation.

Overview of economic reforms

A process of creeping liberalisation hadbeen launched by consecutive Indiangovernments since the late 1970s, andespecially after 1985. However, thecurrent phase of economic reform datesback to July 1991, when following abalance of payments crisis generated bythe withdrawal of international credit andnon-resident Indian (NRI) deposits,

India’s foreign exchange reservescollapsed. The government opted forconditional credit from the InternationalMonetary Fund to deal with the situation,necessitating policies of stabilisation, andan acceleration of ‘structural reform’ aswell as its extension into the external andfinancial sectors.

Stabilisation

In theory, stabilisation required a sharpreduction in the fiscal deficit from itsrecord high of 8.3 per cent of GDP in1990-91 to a targeted 3-4 per cent ofGDP over a short span of time. Inpractice, however, public expenditurereduction has involved a substantialreduction in the expenditure on capitalformation, besides cuts in subsidies aswell as certain other types ofexpenditures. The process of stabilisationalso required a sharp reduction in the‘monetised deficit’ of the government, orthat part which was earlier financedthrough the issue of short-term, ad hocTreasury Bills to the Reserve Bank ofIndia, with the aim of giving the centralbank a degree of autonomy and monetarypolicy a greater role in the economy.

However, progress on reducing thefiscal deficit as a whole has been far shortof target. The fiscal deficit which declinedfrom 8.3 per cent to 5.7 per cent by1992-93, rose sharply to 7.4 per cent in1993-94. It has since remained above 6per cent of GDP in three out of five years,and has never fallen below 5 per cent.

The disconcerting feature of the fiscaldeficit is not so much its level as the factthat a large proportion of it is due to adeficit on the revenue account of thegovernment, rather than capitalexpenditure which would presumably leadto future growth. The revenue deficit,which stood at 3.5 per cent of GDP in1990-91, peaked at 4.0 per cent in1993-94 and has remained well above3 per cent in most subsequent years. Thisimplies that the government has had toborrow large sums to finance even itscurrent expenditure. With access to credit

Public expenditurereduction hasinvolved asubstantialreduction in theexpenditure oncapital formation,besides cuts insubsidies


in the form of low interest Treasury Billshaving been closed as a result of thefinancial liberalisation agenda, thegovernment has had to borrow atrelatively high interest rates from theopen market, substantially increasing theinterest burden on the budget. In fact,the revenue deficit of central and stategovernments combined was at thehistorically high level of 7.2 per cent ofGDP in 1999-2000.

This has occurred at a time when theratio of central taxes to GDP has fallenbecause of (i) a loss of customs revenuesas a result of tariff-reducing tradeliberalisation; (ii) reductions in exciseduties aimed at triggering a consumerboom; (iii) cuts in direct taxes, partlyaimed at providing incentives to save andinvest; and more recently (iv) an industrialrecession that has affected tax collectionadversely. As a result of these variousprocesses, the tax-GDP ratio has fallenquite significantly over the years ofeconomic reform, from close to 11 percent of GDP to less than 9 per cent in1999-2000.

This has meant that even to constrainthe fiscal deficit at existing levels,expenditures have had to be restrainedlargely through cuts in subsidies and capitalexpenditures. Subsidies, which accountedfor 2.3 per cent of GDP in 1990-91 fell to1.3 per cent in 1996-97 and remained atthat level in 1998-99. Food subsidies havebeen sought to be cut through increases inthe prices of food issued through thepublic distribution system to thepopulation above the poverty line, andcapital expenditure, which fell from 5.9 percent of GDP in 1990-91 to 3.7 per centby 1997-98, have risen only marginallyto 4 per cent in 1998-99.

Structural adjustment

The principal aims of the structuraladjustment policies adopted as a part ofthe reform process were: (i) to do awaywith or substantially reduce controls oncapacity creation, production and prices,and let market forces influence the

investment and operational decisions ofdomestic and foreign economic agentswithin the domestic tariff area; (ii) toallow international competition andtherefore international relative prices toinfluence the decisions of these agents;(iii) to reduce the presence of stateagencies in production and trade, exceptin areas where market failure necessitatesstate entry; and (iv) to liberalise thefinancial sector by reducing controls onthe banking system, allowing for theproliferation of financial institutions andinstruments and permitting foreign entryinto the financial sector. Policies specificto the various sectors are consideredbelow.

Industrial policy

Post-reform industrial policy has movedin three principal directions. The first wasthe removal of capacity controls by‘dereserving’ and ‘delicensing’ industries,or abolishing the requirement to obtain alicence to create new capacity orsubstantially expand existing capacity. Asa result of the dereservation of areasearlier reserved for the public sector andthe successive delicensing of industries,there were only nine industries for whichentry by private investors was regulatedat the end of 1997-98.

The second area of industrial reformrelated to the dilution of provisions ofthe Monopolies and Restrictive TradePractices (MRTP) Act, so as to facilitatethe expansion and diversification of largefirms. The MRTP Amendment Billremoved the threshold limits with regardto assets for defining MRTP or dominantundertakings, thereby removing anyspecial controls on large firms.

The third type of liberalisation inindustry involved foreign investmentregulation. The first step in this directionwas the grant of automatic approval, orexemption from case by case approval,for equity investment of up to 51 percent and for foreign technologyagreements in identified high-priorityindustries so long as royalty does not

Food subsidies havebeen sought to becut throughincreases in theprices of food issuedthrough the publicdistribution system


exceed 5 per cent of domestic sales(8 per cent of export sales). As a followup, the Foreign Exchange Regulation Actwas modified so that companies withforeign equity exceeding 40 per cent ofthe total were also to be treated on parwith Indian companies. Further, Non-Resident Indians and overseas corporatebodies owned by them were permitted toinvest up to 100 per cent equity in highpriority industries, with repatriability ofcapital and income. Foreign investorswere also allowed to use their trade marksin Indian markets.

Trade liberalisation

A distinguishing feature of the economicreforms of the 1990s was the effort toeliminate import controls by rapidlyreducing the number of tariff itemssubject to quantitative restrictions,licensing and other forms of discretionarycontrols on imports as well as by cuttingthe rates of tariff on a range ofcommodities. By the middle of 1998 therewere 7117 items that could be importedfreely under the Open General Licence(OGL) Scheme.

However, the process of tariffreduction has not been uniform acrossindustrial sectors. Imports of capitalgoods have been substantially liberalisedby placing them under the OGL category,by reducing tariffs and by offeringconcessional duties for ‘project imports’and imports allowed at zero duty subjectto promises of exports to be realised. Thesame is true of imports of intermediates,access to which have been simplified andsubjected to lower duties.

In the case of consumer goods, untilrecently the government was morecautious, especially with regard to dutyreduction. This was justified by revenueconsiderations and with argumentsregarding ‘non-essentiality’. However,recently, in the two annual export-importpolicies for 1998-99 and 1999-2000,there has been fairly wide-rangingliberalisation of the import of consumergoods which have been placed on the

OGL list, so that currently very fewitems remain on the negative list forimports.

Reforms in agriculture

The economic reforms did not includeany specific package for agriculture. Thepresumption was that freeing agriculturalmarkets and liberalising external trade inagricultural commodities would provideprice incentives leading to enhancedinvestment and output in that sector.However, the pattern of structuraladjustment and the government’s macro-economic strategy since 1991 haveactually been associated with a reducedrate of overall agricultural growth,declines in per capital foodgrain outputand inadequate employment generation.

The post reform strategy involved thefollowing measures specifically related tothe rural areas :

(1) Actual declines in Centralgovernment revenue expenditure on ruraldevelopment (including agriculturalprogrammes and rural employment andanti-poverty schemes), as well as on thefertiliser subsidy, in the budgets of1991-92 and 1992-93 and 1998-99. Someof these cuts, such as that on the fertilisersubsidy, were partially reversedsubsequently, but the overall decline inper capita government expenditure onrural areas has remained.

(2) Very substantial declines in publicinfrastructure and energy investmentswhich affect the rural areas. These havenot related only to matters like irrigationbut also to transport which indirectlycontributes significantly to agriculturalgrowth and productivity through itslinkage effects, besides being animportant source of rural employment.

(3) Reduced transfers to stategovernments which have been facing amajor financial crunch and have thereforebeen forced to cut back their ownspending, particularly on socialexpenditure such as on education and onhealth and sanitation. Quite apart fromtheir welfare implications, these provided

The process of tariffreduction has notbeen uniform acrossindustrial sectors


an important source of publicemployment over the 1980s.

(4) Reduced spread and rising pricesof the public distribution system for food.This had a very important effect on ruralhousehold food consumption in someareas of the country.

(5) Financial liberalisation measures,including reducing priority sector lendingby banks, which have effectively reducedthe availability of rural credit, and thusreduced farm investment, especially bysmaller farmers.

(6) Liberalisation of trade inagricultural commodities. Imports of arange of agricultural commodities havebeen shifted from quota controls to tariffsand these tariffs have been verysubstantially lowered over the 1990s.Exports of important food items,especially rice, have been freed fromcontrols, leading to increased exports ofthese commodities. These have led todeclines in the relative price ofimportables such as edible oils, andincreases in the relative price ofexportables such as rice and cotton.

Exchange rate policy

In a series of steps the government hasmoved to a situation where there is aunified, market determined exchange rateof the rupee, which is fully convertiblefor current account transactions. Inaddition, various financial liberalisationmeasures, discussed below, have haddirect and indirect implications forexchange rate management, since theyaffect the inflow and outflow of short-term capital into the country.

Until the East Asian crisis, thegovernment appeared keen on moving tofull convertibility of the rupee. Theofficial Tarapore Committee, set up todraw up a road map for the process, hadrecommended that the implementation bespread over 1997-98 to 1999-2000 andsuggested preconditions to be metsequentially for this. Besides fiscalconsolidation, a mandated inflation targetand the restructuring of bank capital, the

road-map prescribed a stepwise processof financial liberalisation. However, theEast Asian crisis put plans for a rapidtransition to capital account convertibilityon hold for a time, and the capitalaccount of the balance of payments stillcontinues to be governed by a range ofrestrictions.

Financial liberalisation

An important area where major reformshave been continuously implemented isin the financial sector. The process startedwith the repeal of the Capital Issues(Control) Act, 1947 and the abolition ofthe Controller of Capital Issues.Companies could freely seek financethrough the capital market, subject to theregulations of the newly created Securitiesand Exchange Board of India (SEBI).Indian companies were allowed to accessinternational capital markets throughEuro-equity shares. A range of non-bankfinancial companies, including privatemutual funds were allowed to operate.Investment norms for NRIs wereliberalised and Foreign InstitutionalInvestors (FIIs) were allowed to registerand invest in India’s stock markets,subject to an overall ceiling (30 per cent)and a ceiling for each individual FII in aparticular company’s shareholding. Inaddition, the government did away withthe higher rate of capital gains taxationwhich applied to foreign and NRIinvestment that chose to invest in thestock market. Besides these, a number ofguidelines to ensure transparency in shareissues were specified.

The other element in financial sectorreform was the regulation of the bankingsector in terms of controls on entry byprivate domestic and foreign players, cashreserve ratios and statutory liquidity ratios,entry of financial institutions into thebanking sector, priority sector creditprovision and investments and activities,have been substantially eased. A range ofnew instruments have also been permitted.

Overall, one of the consequences offinancial sector reform was India’s


growing dependence on volatile short-term flows of capital in the form of FIIand NRI investments and NRI deposits.Combined with the decision to allow thevalue of the rupee to be determined bymarket forces, which made central bankpurchases and sales of foreign exchangethe only means by which the governmentcould influence the value of the rupee,resulting in considerable uncertaintyregarding the value of the rupee. Further,domestic policies with regard toexpenditure, interest rates and exchangerates were now influenced by perceptionsof how it would affect foreign investorsentiment. This has substantially reducedthe manoeuvrability of the government.

Assessment of reforms strategy

Agriculture

A slowdown is evident in the agriculturalsector, where the growth rate in theproduction of foodgrain in particular hasdeclined sharply. This is evident from table4.1. For a long time the Indian economyhas experienced a secular growth rate offoodgra in product ion of around2.5 per cent per annum which was a littlehigher than the population growth rate.

However, over the period 1990-91 to1997-98 (both good agricultural years),the growth rate of foodgrain productiondropped to 1.2 per cent which wasdistinctly lower than the populationgrowth rate. In this context, increasedvolumes of exports (both foodgrain andcash crop) along with higher rupee pricesof such exports because of rupeedevaluation, have also meant rapidly risingprices of food in the domestic market.

One important factor behind the dropin foodgrain output growth is the drasticdecline in real public investment that hasoccurred in agriculture over a long period.Gross capital formation remained lowthroughout the 1990s. During the 1990sthere has no doubt been a step up in realprivate gross capital formation in thissector. But much of the increase inprivate investment has been in the non-

traditional sectors of agricultural exportsrather than in foodgrain production.

The year 1999-2000 was notable forsome significant trends in the agriculturesector. First of all, while aggregate outputdid not increase much over the previousyear’s level, output trends in various crops(especially wheat) turned out to be muchbetter than anticipated. Secondly, althoughintersectoral terms of trade movedmarginally against agriculture from thehigh reached in 1998-99, this continued tobe more favourable for agriculture.However, the price situation was markedlydifferent for non-foodgrains thanfoodgrains. Prices of most non-foodgraincrops continued to remain weak, and thoseof some, especially oilseeds, plummeted.This reflected not only domestic demandconditions but also the growing role playedby international prices consequent upongreater integration with world markets inthis sector. On the other hand, foodgrainprices increased at double digit level,despite record production. This is relatedto the third feature, that food stocks heldby the public sector continued to grow,and consumer offtake declined as measuresdesigned to reduce the budgeted foodsubsidy led to substantial increases in theprices of foodgrain in the PublicDistribution System.

In terms of the aggregate price level,1999-2000 was characterised by lowinflation, with the rise in the WholesalePrice Index (WPI) for all commoditiescontained to about 3 per cent per annum.Inflation was even lower for agriculturalcommodities, with the WPI for this groupincreasing by only about one per centover the year. There was, however, adifference in this regard between cerealsand the other crop groups. The WPI forcereals averaged about 10 per cent higherduring 1999-2000 than during 1998-99.

The combination of lower output andlower prices suggests that in 1999-2000,the distress was greatest among growersof oilseeds. Even for cotton, althoughproduction was lower than the previousyear, there were large declines in rawcotton prices.

Domestic policieswith regard toexpenditure, interestrates and exchangerates were nowinfluenced byperceptions of how itwould affect foreigninvestor sentiment

Table 4.1 Growth ofagricultural output

(%)

1980-81 to 1990-91 to1989-90 1997-98

Food grains 2.85 1.41Non-food grains 3.77 3.28All Crops 3.19 2.35Rice 3.62 1.69Wheat 3.57 3.28Coarse cereals 0.39 0.19Pulses 1.49 1.38Total food grains 2.73 1.92Oilseeds 5.46 3.74Sugarcane 2.71 2.48Cotton 2.79 3.52

Source: RBI Annual Report 1999-2000.


One important feature that hasemerged is that for several of these crops,as indeed even for rice and wheat incertain periods, prices for producers havefallen below the government’s MinimumSupport Prices (MSP), which were raisedsignificantly especially for rice and wheat.In a closed economy, lower output isnormally accompanied by some priceincrease. But the emerging pattern ofrelatively lower prices accompanyingrelatively lower output seems to havebecome more frequent during the pastfive years. This reflects the effect of thegrowing integration of Indian agriculturewith world markets, consequent upontrade liberalisation. As both exports andimports of agricultural products havebeen progressively freed, internationalprice movements have been more closelyreflected in domestic trends. And thestagnation/decline in the internationalprices of many agricultural commoditieshas meant that their prices in India havealso plummeted, despite local declines inproduction.

Given the current pattern ofimplementation of the GATT Agreementon Agriculture, most developed countriescontinue to maintain high levels ofexplicit and implicit subsidies for theiragricultural producers. Subsidy levels inthe OECD member countries, afterfalling slightly in 1995-96, are now backto their pre-Uruguay Round levels. Thismeans that Indian cultivators are not onlyoperating in a highly uncertain andvolatile international environment, but areeffectively competing against highlysubsidised large producers in thedeveloped countries.

All this suggests that the government isno longer able to meet the basic objectivesof agricultural price policy, to stabiliseprices and ensure producer incentiveswhile simultaneously protecting the pooragainst undue food price increases.

Industrial growth

Until recently it appeared that there weretwo distinct phases of growth in the post-

reform period, a phase of deflation duringwhich the economy was being sought tobe stabilised, and a subsequent phase ofrecovery, starting from 1993-94. It is nowclear, however, that this recovery was aresult of transient phenomena. Theseincluded the stepping up of the fiscaldeficit in 1993-94, and, even after thefiscal deficit had been lowered in thesubsequent years, the satisfaction of pent-up demand for a variety of hitherto-not-available luxury consumer goods. Sincethe rate of growth of the demand for suchgoods, as opposed to the once-for-allsplurge that the satisfaction of pent-updemand entails, is much lower, thestimulus which such demand imparts toindustrial production evaporates quickly.

Industrial performance was dismal in1997-98 and 1998-99. As a result,compared to an average annual growthrate of 8.4 per cent in the index ofindustrial production (which is distinctfrom real value added in industry) duringthe period 1985-86 to 1990-91, the ratefor the eight years 1991-92 to 1998-99comes to 5.7 per cent (see table 4.2).

During 1999-2000, Indian industryappeared to have once again turned acorner. According to figures released bythe Central Statistical Organisation, afterthree years of poor or indifferentperformance starting from 1996-97, theindustrial sector has experienced a robustrecovery during 1999-2000. The growthin the general index of industrialproduction, which stood at 8.4 per centin 1994-95 and 12.8 per cent in 1995-96,had fallen to 5.6, 6.6 and 3.9 per centrespectively, in the subsequent threeyears. The index of industrial productionfor 1999-2000, however, points to areturn to a higher rate of growth of

Table 4.2 Industrial growth rates per annum(%)

1981-82 to 1990-91 1991-92 to 1998-99

General Index 7.8 5.8Manufacturing 7.6 5.9Electricity 9.0 6.8Mining and quarrying 8.3 3.0

Source : RBI Annual Report 1999-2000.


8.0 per cent. Furthermore, this recoveryhas occurred predominantly in themanufacturing sector, where the rate ofgrowth rose from 4.3 to 9.0 per centbetween 1998-99 and 1999-2000 (seetable 4.3).

There are, however, three factorscalling for caution when interpreting theimplications of the industrial growthfigures for fiscal year 1999-2000. First,the pattern of industrial growthunderlying the overall improvement ingrowth is disconcerting. While there aresigns of a sharp recovery in bothintermediate goods and consumerdurables production, with rates of growthrising from 5.9 to 15 per cent and 4.7 to12.2 per cent respectively, theperformance of the capital goods sectorhas been disappointing with growthactually declining from 11.8 to 4.8 percent. This is all the more significant sincemachinery imports registered a negativerate of growth of 11.22 per cent duringthe year.

Secondly, despite the revival ofindustrial demand in a more open tradingenvironment, non-oil imports haveregistered an extremely low rate of growthof just 1.36 per cent during 1999-2000.This points to a stagnation in importsrequired to service domestic industrialproduction.

Finally, even before the extent andnature of the recovery in the industrialsector could be fully assessed, there aresigns of a slackening of demand in certainindustries. The automobile industry,

where sales figures are quick to come in,is a case in point.

Furthermore, data just released by theCSO (mid-January 2001, reported in TheHindu, January 16, 2001) indicates thatthe actual growth rate of manufacturingproduction in 1999-2000 was only 7.1 percent, certainly lower than was suggestedearlier, and this may be related to someof the weaknesses in the industrial growththat were mentioned above.

The external sector

One of the failures of structuraladjustment in India has been its inabilityto stimulate India’s exports to a degreethat would counteract any tendencytowards stagnation in the domesticmarket. In the recent period, as well as inthe 1990s overall, Indian exports haveperformed much worse than worldexports, and India’s share of total worldtrade has fallen.

Over the fiscal year 1999-2000, themain features of the external trade andbalance of payments of India included thefollowing: a recovery in exports afterthree years of stagnation/decline; an evensharper increase in imports whichconsequently meant a substantialenlargement of the trade deficit; thecontinued positive role played by inwardremittances in keeping the currentaccount deficit in check; and an increasein portfolio inflows which became themost important form of capital inflowover the year. These processes occurredin a period which was marked bysignificant policy changes on the externalfront as well. There was a substantialliberalisation of imports, with the removalof hundreds of items from the listcovered by quantitative restrictions, andprogressive reduction in import tariffs.The inability to provide export subsidiesmeant that commodity exporters inparticular faced problems in a depressedworld market. Meanwhile, there havebeen substantial changes in the capitalaccount as well. Some of these featurescan be easily observed from table 4.4.

Table 4.3 Annual rates of growth of the Index of Industrial Production(%)

General Manufacturing Mining Electricity

1990-91 8.2 9.0 4.5 7.81991-92 0.6 -0.8 0.6 8.51992-93 2.3 2.2 0.5 5.01993-94 6.0 6.1 3.5 7.41994-95 8.4 8.5 7.6 8.51995-96 12.8 13.8 9.6 8.11996-97 5.6 6.7 -2.0 4.01997-98 6.6 6.7 5.9 6.61998-99 4.0 4.3 -1.7 6.51999-00 8.3 8.7 9.3 6.6

Source : GOI 1999e.


Exports increased by 13.2 per cent inUS dollar terms, in positive contrast tothe decline of more than 5 per cent ofthe previous year. As a result, the valueof exports amounted to $37.6 billion. Theturnaround was evident mainly for allcategories of manufactured goods exceptleather and leather manufactures. Theexports of primary goods, especially ofagricultural products, fell by nearly 9 percent, with very sharp falls evident for rice,tea and coffee. Software exports, whichare classified under service exports ratherthan commodity exports, are estimated tohave increased by 53 per cent to reachthe level of more than $4 billion.

Imports also accelerated over the year,with total dollar imports increasing by11.4 per cent to reach $47.2 billion, afteronly 2.2 per cent increase in the previousyear. Much of this was due to the increasein international oil prices. However, non-oil imports also increased.

The invisibles account remained thesource of strength for the balance ofpayments. The net surplus on invisiblesamounted to nearly $13 billion, up fromjust above $9 billion in the previous year.This was essentially due to the continuedstrength of remittance income, whichamounted to $12.26 billion and was ableto counteract the increase in outflows ofinvestment income (profits and interest)which was as high as $3.6 billion. Onehealthy sign is that the geographical baseof such remittance income has expandedbeyond the Middle East.

It is significant that in 1999-2000, asindeed in almost every other year since1991, total net invisibles (led essentiallyby remittance income) have been greaterthan all forms of capital inflow takentogether (see table 4.5).

Portfolio investment recovered fromthe net outflow recorded in 1998-99, andin fact grew so rapidly as to outstrip FDIas it had earlier in 1995-97. The difficultywith excessive reliance on such inflowsis well known after the experience ofseveral emerging markets over the 1990s.Thus, the rediscovery of India as adesirable destination by international

portfolio investors is at best a mixedblessing.

Over the year, the capital account hasbeen progressively liberalised. There havebeen measures to further liberalise easeof entry and exit of foreign capital, aswell as access of domestic firms to foreignborrowing. Thus, Indian companies havebeen permitted to issue rights/bonusshares and non-convertible debentures tonon-residents, as well as to issue units toFIIs with repatriation benefits. Policiesfor both external commercial borrowingand foreign direct investment have beenvery substantially liberalised. Similarly,rules for capital export have also beenliberalised for Indian companies in sectorslike IT, pharmaceuticals andbiotechnology.

Fiscal patterns

The usual justification for ‘rolling back’the state is that the fiscal deficit must becut, since it is a source of instability ofthe economy. Not only is this argumentquestionable, but, what is more, thispackage tends to intensify the fiscal crisis.

Table 4.4 Key Indicators of the balance of payments (as per cent of GDP)

1990-91 1996-97 1997-98 1998-99 1999-2000

Exports 6.2 8.9 8.8 8.2 8.5Imports 9.4 12.8 12.6 11.3 12.3Net invisibles -0.1 2.7 2.4 2.2 2.9Current account deficit -3.2 -1.2 -1.4 -1 -0.9Foreign investment 0.03 1.6 1.3 0.6 1.1


Table 4.5 Capital inflows (in US dollar million)

Per cent of total 1990-91 1997-98 1998-99 1999-2000

Foreign direct investment 1.4 36.2 29 21.2Portfolio investment 0.1 18.6 -0.8 29.5External assistance 31.3 9.2 9.6 8.8External commercial borrowing 31.9 40.6 50.9 3.1Short-term credits 15.2 -1 -8.7 3.7NRI deposits 21.8 -7.8 -9.4 -6.9Rupee debt service -16.9 -7.8 -9.4 -6.9Other capital 15.2 -7.2 9.1 19.8Total - US$ million 7,056 9,844 8,565 10,242



There is an important distinction to bemade here. In an economy that isliberalised with respect to the capitalaccount of the balance of payments, andhence open to speculative capital flows,it may well be the case that speculatorslook at the size of the fiscal deficit whichthus becomes a determinant of their stateof confidence, but this is different fromsaying that the fiscal deficit per se isdestabilising. The latter argument isuntenable for several reasons.

First, the size of the fiscal deficit,which shows the net demand arising fromthe government, does not have anythingto do directly with ‘instability’ in the senseof either generalised inflationary pressuresor an unmanageable trade deficit, sincethe latter depend upon ex ante excessaggregate demand. Secondly, whileborrowing to meet current expendituresdoes require scrutiny (though it is notalways reprehensible, for example, in arecession) since it is indicative of ‘livingbeyond one’s means’, there is nothingnecessarily wrong with borrowing to meetinvestment requirements. If the focus wason a reduction of the revenue deficit, thenit might make sense, but by emphasisingthe fiscal deficit as distinct from therevenue deficit, the IMF and the WorldBank deliberately try to negate the role ofthe government as an investor. Thirdly, areduction in the revenue deficit, or in thefiscal deficit, can be brought about in anumber of different ways, the obviousone being by an increase in direct taxrevenue. Indeed in any developingeconomy where glaring poverty coexistswith offensive opulence, increasedrevenue from direct taxes is urgentlycalled for anyway as a means of reducinginequalities. But policies of liberalisationunderplay this avenue of deficit reductionand emphasise cuts in investment andwelfare expenditures.

Not only is the theory underlying suchcuts invalid, but the fiscal deficit which isinvoked to legitimise such cuts getsaggravated because of structural

adjustment. Since inviting direct foreigninvestment becomes an overridingobjective of economic policy, the rates atwhich they are taxed get reduced incompetition with other countries. This,for reasons of symmetry, means thatdirect tax rates on the rich as a whole arelowered. Since customs duties are cut aspart of the import liberalisation package,and excise duties, again for reasons ofsymmetry, cannot be raised as aconsequence, indirect tax revenues toosuffer. This is aggravated by thesluggishness in output growth rate thatcuts in government expenditure mayengender.

While tax revenues cannot be raisedfor lowering budget deficits, the increasedinterest rates result in a larger interestburden on the government. Increasedinterest rates on public sector borrowingare typical results of the financialliberalisation process. Two features areparticularly significant in this process :first, the removal of interest rate caps andother such restrictions in the creditmarket, which allow all interest rates togo up; and the raising of norms on thestatutory liquidity ratios and other suchcompulsory holding of governmentsecurities, which force the government totake recourse to open market borrowingto finance deficits.

Thus this type of structural adjustment,which aims to restrict the fiscal profligacyof the state, contains within itselfprocesses which work to aggravatefurther the fiscal situation, through lowertaxes on the rich and higher interest rates.

The fiscal adjustment in India has leftthe size of the revenue deficit unchangedor even enlarged, and instead impingedheavily on public investment and welfareexpenditure. The process of adjustmenthas further entailed a very specific fiscalregime, which has increased transfersfrom the state to rentiers in the form ofinterest payments, and to enforce largerfiscal burdens on the people and cuts inpublic investment (see table 4.6).

The fiscaladjustment in Indiahas left the size ofthe revenue deficitunchanged or evenenlarged, andinstead impingedheavily on publicinvestment andwelfare expenditure


Poverty and employment

There is now substantial evidence thatIndia’s success at reducing the incidenceof poverty during the 1970s and 1980swas halted, if not reversed, during the1990s. Estimates made at the World Bank(Datt 1999) show that the incidence ofpoverty, which between 1972-73 and1989-90 fell from 55.4 per cent to34.3 per cent in rural India and from 54.3to 34.1 per cent nationally, has insubsequent National Sample Survey(NSS) rounds up to 1997 (when theincidence was 34.2 per cent national and35.8 per cent rural) never gone below the1989-90 level and has in fact risen tomuch higher levels in individual years.Other estimates (eg., Gupta 1999) suggestan even greater increase in rural povertyduring the 1990s. The estimates for thehead count ratio of per cent of ruralpopulation living in absolute poverty, areprovided in table 4.7. All these estimatesindicate, moreover, that the gap betweenrural and urban areas, which haddecreased during the 1980s and the 1970s,increased considerably during the 1990s.

Food items have a large weight in theindices of consumer prices for industrialworkers and agricultural labourers,especially the latter. The faster rise inthese indices are therefore, likely to resultin faster increase in the prices of variousfood items, particularly cereals, than ofother items consumed by the rich. Thuswhat emerges is that one of the reasonsfor the stagnation in real per capitaconsumption and therefore of theincidence of rural poverty during the1990s is the adverse consequence thatrising food prices have had for the poorer

sections of India’s population. Clearly, therise in the relative food prices during the1990s has hit the poor hard, even at atime of relatively high income growthwhich itself was accompanied by someincrease in the inequalities in nominalconsumption expenditures.

But in addition to this decline in thepurchasing power of the incomes of therural poor, the rate of growth of percapita rural income in real terms hassharply decelerated. This fall in ruralincomes is, however, not just because theshare of agricultural income in nationalincome has fallen. The share of non-agricultural incomes in total rural incomeswhich rose sharply between 1977-78 and1990-91, has stagnated since then. Onereason why rural poverty declined duringthe 1970s and the 1980s was that income

Table 4.6 Some fiscal magnitudes as ratios of GDP(%)

Revenue deficit Fiscal deficit Interest Subsidies

1988-89 -2.7 -7.8 4 2.21989-90 -2.6 -7.8 4.3 2.61990-91 -3.5 -8.3 4 2.51991-92 -2.6 -5.9 4.3 2.21992-93 -2.6 -5.7 4.5 1.91993-94 -4 -7.4 4.5 1.61994-95 -3.2 -6.0 4.6 1.31995-96 -2.7 -5.4 4.5 1.21996-97 -2.6 -5.2 4.6 1.31997-98 -3.3 -6.3 4.7 1.41998-99 -3.8 -6.5 4.8 1.31999-00* -2.3 -4.4 3.7 0.9

Notes: * refers to Budget estimates- Revenue deficit refers to current expenditure minus current revenue- Fiscal deficit refers to all expenditure minus current revenue, that is revenue deficit plus capital

expenditure- Interest refers to all interest payments of the government- Subsidies refers to all direct budgetary allocation for subsidies, i.e. Food and Fertiliser subsidies

Source : Economic and Political Weekly, Budget Number, May 1997 & Budget at a Glance, Ministryof Finance, Govt. of India, 1999-2000.

Table 4.7 Estimates of rural head count poverty ratios

NSS Year Rural poverty ratio Rural poverty ratio Real per capita consumption Gini-IndexRound World Bank S.P. Gupta (1973-74 prices)

46 Jul 90 - Jun 91 36.43 35.00 66.73 27.7248 Jan 92 - Dec 92 43.47 41.70 63.80 29.8850 Jul 93 - Jun 94 36.66 37.30 67.45 28.5851 Jul 94 - Jun 95 41.02 38.00 66.39 30.1752 Jul 95 - Jun 96 37.15 38.30 67.37 28.43

Source : Datt 1999 and Sarvekshana, various issues.


earning opportunities in the rural non-agricultural sector, expanded substantially,driven mainly by a large expansion ofgovernment expenditure in the ruralareas. The reduction in such expenditureduring the years of reform has affectedthat expansion adversely.

In terms of rural employment patterns,table 4.8 presents the work forceparticipation rates (number of all workersas a ratio of total population) for menand women in rural India from the early1970s to the late 1990s. It is evident thatthe male work force participation rateshave remained broadly stable over thisentire period. The overall picture offemale work force participation in therural areas is one of fluctuations around adeclining trend. Female work forceparticipation rates were, on average,significantly higher in the 1970s until themid-1980s. The latest year in fact showsthe lowest rate over the entire period.

There is now significant evidence thatthe main dynamic source of ruralemployment generation over the periodfrom the mid 1970s to the late 1980s wasthe external agency of the state ratherthan forces internal to the rural economyor other extra-rural forces includingmodern industry and commerce. In fact,in most areas the pivotal role in theexpansion of rural non-agriculturalemployment appears to have been playedby the expansion of governmentexpenditure.

The pattern of structural adjustmentand government macroeconomic strategysince 1991 involved the followingmeasures which specifically related to therural areas : (i) Actual declines in Centralgovernment revenue expenditure on ruraldevelopment (including agriculturalprogrammes and rural employment andanti-poverty schemes), resulting in anoverall decline in per capita ruralgovernment expenditure. (ii) Substantialdeclines in public infrastructure andenergy investments which affect the ruralareas. These have related not only tomatters like irrigation but also totransport and communications which

indirectly contribute significantly even toagricultural productivity, besides being animportant source of rural non-agriculturalemployment. (iii) Reduced transfers tostate governments which have beenfacing a major financial crunch and have,therefore, been forced to cut back theirown spending, particularly on socialsectors such as education and health andsanitation, which had provided animportant source of public employmentover the 1980s. (iv) Reduced spread andrising prices of the public distributionsystem for food. (v) Financialliberalisation measures which effectivelyreduced the availability of rural credit.Thus, in the 1990s, several of the publicpolicies which contributed to moreemployment and less poverty in the ruralareas in the earlier decade, have beenreversed.

Pakistan

Like India, Pakistan had adopted a mixedeconomy approach to development,consisting of an import-substitutionstrategy and the public sector dominationof major sectors of the economy.However, the role of the private sectortill the 1970s was relatively morepervasive than in India. Withnationalisation of the financial sectorinstitutions and heavy industry during theearly 1970s, the public sector becamemore prominent. As a result of growinginefficiency and losses by the publicsector enterprises, Pakistan was soonfaced with high macro imbalances. In1988, the government was forced to enterinto stabilisation and structuraladjustment programmes with the IMFand World Bank. However, the economicperformance during the 1990s had beenunsatisfactory. The growth rate haddeclined considerably and poverty hadincreased.


The adjustment programmes agreed withthe World Bank, IMF and the Asian

Table 4.8 Work participationrates for rural menand women

(%)

Male Female

1972-73 54.5 31.81977-78 55.2 33.11987-88 53.9 32.31989-90 54.8 31.91990-91 55.3 29.21993-94 55.3 32.81994-95 56 3.171995-96 55.1 29.51997 55 29.11998 53.9 26.3

Source: Sarvekshana, various issues.


Development Bank comprised policies ofstabilisation as well as structuraladjustment. The IMF was mainlyconcerned with the stabilisation of theeconomy, while the other two donorswere responsible for the structuralreforms. The reform measures introducedsince 1988 had historical precedents asPakistan had negotiated a number ofloans with the World Bank and IMFduring the 1980s. However, theseattempts were mostly piecemeal and adhoc in nature. The reforms introducedsince 1988 were comprehensive in scope,comprising of stabilisation, structuraladjustments and institutional reforms.

Stabilisation policies

The high macro-economic imbalancesminimise the efficacy of market signalsprovided by the incentive structure to theeconomic agents. It is for this reason thatstabilisation measures precede theintroduction of structural reforms. Thevarious programmes negotiated with theIMF had, therefore, stipulated sharpreduction in the fiscal deficits from about-8 per cent of GDP to a sustainable levelof about -4 per cent of GDP over theprogramme period. The measuresrecommended were reduction ofsubsidies, upwards adjustment of usercharges, expenditure curtailment and taxreforms aimed at revenue mobilisation.The stabilisation measures had alsostipulated sharp credit restraints and areduction of the monetisation of fiscaldeficit through monetary reforms.

Structural adjustment policies

Pakistan had been suffering from deep-rooted structural distortions hinderingachievement of high economic growth.Slow growth rates had increased theincidence of poverty during the 1990s.The high protection to industries becamea source of inefficiency. The pervasivepresence of public enterprises hasexacerbated the fiscal deficits. Theresource mobilisation has been

constrained by a narrow-based tax system,high interest payments, subsidies, andnon-development expenditure on defenceand establishment. Other economicproblems were due to deterioratingirrigation and drainage system slowingdown agricultural growth, anti-export biasof the trade and tariff regimes leading toweak export growth, and weak financialsystem constraining private sector growth.The government had adopted acomprehensive structural reformprogramme to address these problems.

Public finance reforms

With respect to public finance, theadjustment programme had aimed toreduce the fiscal deficit by improvingresource mobilisation and curtailingpublic expenditure. On the revenue side,resource mobilisation was to be done byexpanding the coverage of the tax net andimproving its elasticity. A structural shiftaway from taxes on international tradeand excise duties was to be effected. Itwas envisaged that a revamped direct taxsystem including taxation of agriculturalincomes and the broad-based sales taxwould generate enough resources to makeup for the loss of revenue from reducedtaxes on international trade and domesticproduction. The reduction in rates ofdirect tax on incomes was introduced tocurb tax evasion.

The increases in the expenditure onsocial sectors and essential developmentprojects were envisaged. The adverseimpact on the size of fiscal deficit was tobe avoided by counter-balancing theincreased public expenditure by plannedreductions in transfer payments(especially subsidies) and currentexpenditures in areas such as defence.

Financial sector reforms

The monetary and fiscal mismanagementin Pakistan has been the root cause ofmacro-instability. High fiscal deficits wereaccommodated either by increased moneysupply or by requiring commercial banks


to hold extensive government debt atbelow market rates. Subsidised lending toagriculture, exports and locallymanufactured machinery was also animplicit tax on the banking system.

Government of Pakistan initiated aprocess of financial sector reforms at thebeginning of the 1990s. The aim of thereform process was to enhance theefficiency of the financial sector and toensure its health and viability. Thereforms cover enhancement ofcompetition in financial sector throughprivatisation of the state-owned financialinstitutions and by allowing theestablishment of new financial institutionsin the private sector; rationalisation ofinterest rates structure by eliminatingsubsidised credit; replacement of directcontrols by market-based monetary andcredit management and strengthening ofregulatory and supervisory framework bymaking the State Bank of Pakistanautonomous.

Monetary and credit management

A number of fundamental changes havealso been made in the conduct ofmonetary and credit management whichessentially marked a departure fromadministrative controls and quantitativerestrictions to market-based monetary andcredit management. The introduction ofpublic debt auctions, abolition of creditceiling and credit deposit ratio (CDR),active open market operations, theprudential regulations announced by theState Bank of Pakistan and strengthenedsystem of loan recovery were meantto improve monetary and creditmanagement.

Capital market reforms

Since the start of the privatisation andopening up of the capital account in 1991,equity market in Pakistan has grownrapidly. The equity market remainshowever, underdeveloped, shallow andsubject to manipulation from insidertrading. The government has imple-

mented a number of reforms to rectifythe malpractices and strengthen thecapital market. Removal of tax anomaliesand provision of incentives by way ofrelaxing limits in shares by providentfunds and insurance companies have beenthe main reform areas. The conversionof the Corporate Law Authority into anautonomous Securities and ExchangeCommission has also been helpful forrapid growth of the capital market.

Trade policy reforms

Historically, Pakistan’s trade policy wasbiased towards import substitution withpervasive non-tariff barriers, high averagetariffs, a wide dispersion of tariff rates withnumerous exemptions and a duty draw-back system and cash subsidies for theselected manufactured exports. Asubstantial move towards tradeliberalisation was negotiated by thegovernment with the IMF and World Bankin the early 1980s. The reductions inquantitative barriers were to be followedby tariff reforms. The reduction in non-tariff barriers has been a continuousprocess during the 1980s and the 1990s.Each year, at the time of the finalisationof the budget and the trade policy,measures aimed at trade liberalisation wereannounced. But the tariff reforms wereslow in actual implementation. The fear ofloss of revenue from tariff reforms by thegovernment was a dominant considerationin the slow implementation of tariffreforms. The pace of trade reforms wasfaster since 1988-89, however (seetable 4.9).

Like most countries in the developingworld, the tariff structure of Pakistan iscascading in nature. The maximum rateof tariff in 2000-2001 was 30 per cent,with the exception of automobiles andalcoholic beverages which attract higherrates of duties. The minimum rate ofimport duty of zero per cent is generallycharged on basic raw material, food stuffand other essential imports.

In March 1993, import licences wereabolished for all goods except those on


the negative and the restricted list. Thescope of lists specifying prohibited and/or restricted imports has also been sharplyreduced. However, the trade regime evennow contains some anti-export bias as thetariffs are still high and some itemsremain in the restricted list for imports.

Until 1983-84, the import licencescould be issued for only those productswhich were specified either on the freelist or the tied list. Import licences issuedunder the tied list could be used forimports from only those countries whichwere explicitly mentioned in the tied list.A major liberalisation of the import policytook place in 1983-84. The list coveredall such products which could not beimported. Products on the tied lists canbe imported from specified sources or forspecified users. All other products can beimported from any country without anyrestrictions after obtaining an importlicence. With the passage of time, thenumber of products on the negative listhas been reduced, i.e., imports of moreproducts has been allowed.

The introduction of the negative listhas been a major step forward, as it allowsfree imports of capital goods andindustrial raw materials. However, mostof the goods produced in the countryhave continued to remain on the negativelist. This has provided excessiveprotection even when the tariff rates arelow.


Pakistan followed a fixed exchange ratepolicy from 1947 to 1982. Theappreciation of dollar in the early 1980sagainst other major currencies adverselyaffected the competitiveness of Pakistaniproducts in international markets becauseat that time the rupee was linked to U.S.dollar. Given Pakistan’s widely diversifiedtrade and financial relations, the rupeepeg to a single currency proved costly ifthe currency to which it was peggedappreciated considerably. To maintaincompetitiveness of exports, a managedfloating exchange rate system wasadopted with effect from 1982. Underthis system, the value of the Pakistanirupee was reviewed daily with referenceto a trade-weighted basket of currenciesof the country’s major trading partners/competitors. Small adjustments are madein the value of the rupee as and whencircumstances indicate a need for suchadjustments, keeping in view the relativechanges in exchange rates and prices ofthe country’s major trading partners/competitors, as well as major macro-economic indicators of Pakistan.

Deregulation of economic activity

The government had been regulating theresource allocation process throughnumerous direct controls in the form of

Table 4.9 Indicators of trade liberalisation

Fiscal Items removed Items removed from Maximum Import Iqra LicenseYear from negative lista restricted listb tariff (%)c surcharge (%) surcharge (%) fee (%)

1987-88 136 10 225 5 5 41988-89 169 51 125 6 5 51989-90 70 20 125 7 5 51990-91 97 43 95 10 5 61991-92 23 17 90 10 5 61992-93 21 11 90 0 5 61993-94 1 1 90 0 5 61994-95 8 – 70 0 0 01995-96 11 – 65 0 0 01996-97 – 17 65 0 0 0

Notes:a: Items removed are a mixture of numbers and categories and, therefore, are only a broad indication.b: the concept of restricted list abolished in 1994-95. Restricted list contains importable products by specified

importers and industrial consumers only.c: Automobiles and alcohol continue to carry tariffs up to 425%.

Source: MHHDC staff calculations.

Most of the goodsproduced in thecountry havecontinued to remainon the negative list


investment sanctions, price controls andthe practice of cost-plus pricing. Thestructural reforms introduced since 1980had reduced, and in some cases evenabolished, the direct controls oneconomic activity. Cost-plus pricing inkey industries of cement, fertiliser andvegetable ghee had been stopped. Thederegulation measures implementedduring the 1980s made substantialprogress towards market-orientation ofthe economy. The remaining regulationsand administrative bottlenecks for bothdomestic and foreign investors wereremoved during the 1990s.

Investment controls were eased in theearly 1980s. 170 industries were put on apositive list in 1984. Investors in theseindustries did not require an investmentsanction if the value of the investmentwas below a certain specified limit.Industries with a value of investmentabove the specified limit required thesanction. Investment projects having alarge import component for inputs andmachinery, had to be approved by thegovernment.

The nature of price reforms introducedin agriculture, energy and public utilitieswas to provide price incentives that leadto efficient consumption and productiondecisions. In the case of the agriculturalsector, support prices of major cropswere targeted to move closer to theimport or export parity prices. This wasto be done each year at the time offixation of support prices for differentcrops. The input subsidies were to becurtailed and/or removed. The economicpricing of gas, oil and electricity was alsointroduced gradually during the 1980s and1990s. Considerable progress has alreadybeen made in moving the prices of thesegoods to the level of import parity prices.

Under the Price Control and Preventionof Profiteering and Hoarding Act 1977,the government fixed prices of 66 essentialproducts. With the de-control measures,the government no longer fixes the pricesof these essential products. Despite this,the price controls continue to exist inmany forms. The Ministry of Health

continues to fix the prices of drugs andmedicines. The prices of goods producedby the public utility companies are subjectto control by the government. From timeto time, provincial and local authoritiesalso fix the prices of commodities theyperceive to be in short supply.

In order to encourage investment inindustries for which the prices werecontrolled, the government had operateda system of subsidies and surcharges toensure a specified return on equity toproducers. Profits higher than thespecified rates were captured bygovernment through surcharges. Anyshortfall in the profit rate was matchedby government subsidies. This systemoperated in cement, edible oils, fertilisers,and petroleum-refining industries.

The system of cost-plus pricing wasnot helpful in achieving efficiency. Theimprovement in productivity wassiphoned off through surcharges while fallin productivity was protected bysubsidies. With a view to improvingproductivity, cost-plus pricing system wasended for the cement, vegetable oil, andfertiliser industries. The prices and profitsof these products are now determined bythe market forces.

Industrial policy reforms

The industrial policy was revised with afocus on giving more space and freedomto the private sector, which is expectedto assume a major role in futureindustrialisation process. In the past,effective implementation of industrialpolicy was hindered by the hesitantparticipation of the private sector in anatmosphere of uncertainty regardinggovernment’s economic policies,procedural delays in the approval ofprojects and inadequacy of infrastructuralfacilities.

Main feature of the industrial policywith respect to government controls hasbeen that government sanctions are nolonger required for the establishment ofnew industrial units, irrespective of size,sponsorship or location; the only exception


to this policy framework are industrieswhich are controlled for security orreligious reasons. For newly-establishedindustries, liberal tax and tariff concessionshave been allowed; the requirement forobtaining sanctions for industrialinvestment has been removed; foreignexchange transactions have beenliberalised; foreign investment is permittedup to 100 per cent of equity without priorapproval; profits and capital can beremitted without difficulty; the fixation ofinterest rates, technical fees, and royaltieshas been left to the market forces.

In the past, tax holidays were grantedto different industries and/or someindustries in different locations. Suchincentives implied huge losses in revenuefor the government. These incentiveswere also non-transparent. Thegovernment’s declared policy is to moveaway from the granting of tax incentives.

Restructuring of public sector enterprises

The significant burden on the treasuryimposed by the losses of the public sectorenterprises (PSEs) and their lowefficiency levels were two main areas ofpolicy concern for the public enterprises.

The government initially tried toimprove the performance of publicenterprises by the introduction of a‘public enterprises signaling system’ whichattempted to force such enterprises tobehave like private firms. In addition,management autonomy was given to thestate enterprises. The continuing burdenon the treasury from the assured accessto formal credit for such enterprises andother subsidies has forced thegovernment to reduce the number ofpublic enterprises in the economy. Theprivatisation programme is based partlyon the perception that public sectorenterprises are inefficient and have placedundue burden on the budget.

Privatisation

The privatisation of industrial andfinancial institutions was extremely slow

during the 1980s. By the end of the 1980sthe government-owned industrialenterprises constituted 10 per cent ofvalue added in manufacturing industries.Government-controlled companies weredominant actors in a wide range ofsub-sectors including fertilisers, cement,automobiles, iron and steel, agro-processing, engineering, chemicals andtextiles. The government also had amonopoly control in telecommunications,the power sector, rail and air transport.Petroleum and gas extraction werecontrolled by the state-owned companiesand/or joint ventures between thegovernment and international oil and gascompanies. The government hadlaunched a huge effort in 1990 to privatisethe PSEs. However, Pakistan has beensuccessful in privatising only small andmedium-sized industrial units andrelatively smaller commercial banks. Thepace of privatisation has been slow in theface of complexities of dismantling largeunits. Absence of regulating frameworksand retrenching surplus labour haveemerged as major constraints.

Assessment of reform strategy

At the time of introduction ofcomprehensive adjustment programme in1988, the stability of Pakistan’s economy,by reducing its fiscal and balance ofpayments deficits, was the key priority.The economy had grown strongly during1980-87 at 6 per cent per annum. Theincidence of poverty had declined sharplyduring this period. There was someconcern about the sustainability of highgrowth as the growth was financed bylarge domestic and foreign borrowings.

The reform programme had twoexplicit objectives of stabilisation andassuring the sustainability of past highgrowth through removal of structuraldistortions. It was presumed that povertywould be automatically reduced with highand stable growth. However, the impactof reforms on growth, stability and humandevelopment has been contrary to thepolicy-makers’ expectations. All previous

Pace of privatisationhas been slow in theface of complexitiesof dismantling largeunits


gains in terms of growth and povertyreduction were reversed in the 1990s.

Impact on growth

There is strong evidence showing thatreforms had resulted in a significant slow-down in all sectors of the economy. Table4.10 shows the average performance bydecades, while figure 4.1 shows the GDPand sectoral growth rates on an annualbasis during the 1990s.

The overall growth rate of GDP fellfrom 6.5 per cent in 1980s to 4.6 percent during the 1990s. The growth inindustry had declined by 42 per cent inthe 1990s relative to the earlier decade.Agriculture and services also showedsignificant declines in growth rates. Theyearly variation in the growth rates werelarge for agriculture and large-scalemanufacturing sector.

Agriculture

Despite the slow-down in agricultureduring the 1990s, the value-added in thesector has grown at 4.6 per cent per year.The magnitude of agricultural growth hadbeen larger than any country in South Asia.There had been two major problems withthe nature of agricultural growth, however.First, there had been a lot of fluctuationsin agricultural growth in the 1990s. Insome years, there had been a decline inabsolute terms. Secondly, the decline andinstability in the agricultural sector hadbeen concentrated mostly in the crops sub-sector. Livestock, fisheries and forestry hadnot exhibited much fluctuations. Thedecline in agricultural production had beenattributed to bad weather, pest attacks,declining public investment in the sectorand the deteriorating irrigation anddrainage system. The impact of improvedprice incentives for agricultural sector fromreforms was more than counter-balancedby the adverse non-price factors facing theagricultural producers. Table 4.11 showsthe pattern of growth of agriculture.

Industry

The industrial sector had declined themost during the post reform decade.Value-added in large-scale manufacturing,

especially cotton ginning and sugarindustries, was hurt by the declinein output of cotton and sugar cane.The removal of export duty oncotton had increased the cost ofraw material for cotton textiles.Cement output had fallen due tocontraction in demand from slow-increasing private investment andsharp cut-backs in publicinvestment. However, that variationin industrial growth was dominatedby changes in the output of themanufacturing and constructionsub-sectors. Electricity and mininghad a limited impact on variabilityof growth rates in industrial sectordue to their small weight in theindustrial output (see table 4.12).

Table 4.10 Average annual growth rates

Sector 1980-81 to 1990-91 to Extent of1989-90 1999-2000 Reduction (%)

GDP 6.5 4.6 -29.3Agriculture 5.4 4.4 -18.5Industry 8.2 4.8 -41.5Services 6.7 4.6 -31.3

Source : Government of Pakistan, Economic Survey, various issues.

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

Figure 4.1 Annual growth of GDP and sectors

Source: Government of Pakistan, Ecnomic Survey, various issues.

GDP

Agriculture

Years

Industry

Services


What are the factors responsible forthe slow-down in industrial growth?Decline in public investment, highinterest rates, shrinkage of demand fromimport liberalisation, low demand from aslowly growing agricultural sector, poorexport performance and lower supply ofcredit are some of the factors that explainthe slow-down in industry.

Impact on stability

Macroeconomic stability is an essentialrequirement for equitable, high andsustainable growth. High fiscal deficitseventually end up in high inflation withadverse consequences for exportexpansion, capital flight and social well-being of the majority of population. Highfiscal and current account imbalances alsomake the country dependent oninternational financial institutions.

Despite the stipulation of structuraladjustment packages negotiated withdonors that the fiscal deficit will bereduced to the sustainable level of 4 percent of GDP, Pakistan has neversucceeded in decreasing the fiscal deficit.

There was, however, a reduction ofabout 2 per cent of GDP in the overallfiscal deficit. This has been brought about

mainly by the reduction in developmentexpenditure. There was no increase in taxto GDP ratio. There was, however, a slightdecline in expenditure on subsidies in linewith the conditions agreed between thedonors and the Government of Pakistan.The expenditure on debt servicing hasincreased significantly as it has gone upfrom 7.2 per cent of GDP in 1990-91 to11.8 per cent in 1999-2000. The size ofpublic debt as a percentage of GDP ishighest in Pakistan relative to all othercountries in South Asia. Rising expenditureon interest payments is a source ofincreasing inequity. The reduction in fiscaldeficit through cuts in public investment

Table 4.11 Agricultural growth by crops(% growth)

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

All crops -10.9 1.1 6.6 7.7 -3.8 8.0 0.3 11.5Food crops 1.3 4.5 7.4 3.4 0.6 8.8 1.5 13.4Fibre crops -29.2 -1.3 8.3 21.9 -11.4 -2.3 -4.3 27.8Other crops -1.4 6.9 11.0 -2.9 -4.2 22.6 3.6 -13.9

Source: GOP, Economic Survey, various issues & GOP, State Bank of Pakistan Annual Report 1998-99.

Table 4.12 Industrial sector growth(% growth)

Years Mining & Manufacturing Construction Electricityquarrying and gas

1990-91 10.36 6.25 5.70 11.001991-92 2.44 8.05 5.98 9.071992-93 3.00 5.35 5.80 6.381993-94 4.66 5.39 1.64 3.171994-95 -4.30 3.69 1.01 16.831995-96 7.07 4.80 3.25 10.141996-97 1.87 1.29 1.09 -2.911997-98 -9.70 7.88 1.26 8.961998-99 3.17 3.73 -4.92 17.141999-2000 6.15 1.42 5.15 -9.83

Source: GOP, Economic Survey, various issues.

Table 4.13 Fiscal imbalances(% of GDP)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Gross fiscal deficits -8.8 -7.5 -8.1 -5.9 -5.6 -6.5 -6.4 -7.7 -6.1 -6.5Revenue deficits -3.5 -2.6 -2.6 -4.0 -3.2 -2.7 -2.6 -3.3 -3.8 -2.3

Interest (domestic) 4.9 5.2 5.9 5.8 5.2 6.3 6.6 7.6 7.5 8.3Subsidies 0.9 0.7 0.6 0.5 0.5 0.6 0.8 0.7 0.9

Total debt servicing 7.2 8.0 8.3 9.3 8.8 9.3 10.8 10.7 11.7 11.8Tax as % of GDP 12.7 13.7 13.4 13.4 13.8 14.4 13.4 13.2 13.3 12.8Development exp. 6.4 7.5 5.7 4.5 4.4 4.4 3.5 3.3 3.6 3.2



has adversely impacted on the growthprogrammes. The wasteful expenditure onunproductive projects was symptomatic ofdeterioration in the quality of governance.The failure to achieve the targetedreduction in the fiscal deficit, especially byincreased tax efforts, was due to thedominant influence of the vested interests.

The key indicators of balance ofpayments, shown in table 4.14, indicateweak export performance during the1990s.

Imports were compressed to keep thetrade imbalance from rising too rapidly.Nevertheless, large current accountimbalances had emerged as a majorsource of instability and vulnerability.FDI and other forms of capital inflowswere not attracted towards Pakistan onany significant scale. Due to high foreignindebtedness and occasional disputes withforeign investors, the investment climatein Pakistan was not attractive for largecapital inflows. Foreign reserves hadremained low.

Impact on human development

The economic reforms during the 1990swere not specifically aimed at employmentgeneration. Rapid growth was expected togenerate high employment expansion. Inthe past, increased job opportunities hadresulted in rapid poverty reduction. Lowinflation was also expected to result inreducing the incidence of poverty.

Changes in poverty levels

There is now considerable agreement thatPakistan’s earlier success in reducing theincidence of poverty has been reversedduring the 1990s. The trends in poverty

for the period of 1984-85 to 1998-99 arereported in table 4.15. Data show thatbetween 1984-85 and 1987-88, overall, aswell as for rural areas, poverty levelsdecreased. Continued overseasremittances and introduction of the safetynets in the form of Zakat and Usher inthe 1980s explain the progress made inthe reduction of poverty by 1987-88.

During the 1990s poverty hasincreased, and currently 35 per cent ofhouseholds in the country are below thepoverty line. Poverty increased from21 per cent in 1990-91 to 35 per cent in1998-99. This increase in poverty islargely attributed to macro-level factorssuch as decrease in overseas remittances,high unemployment rate and low growth.

Worsening employment situationduring the 1990s explains the rapid risein poverty during this period. The realwages of the employees in public sectorhave declined due to high inflation andinadequate adjustment to the cost ofliving in the nominal wages. The workforce in the informal sector hasexperienced a decline in their real wages.

Table 4.14 Key balance of payments indicators(% of GDP)

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Exports 13.0 13.9 13.2 12.9 12.8 13.2 13.0 13.6 12.8 13.3Imports 18.5 18.6 19.6 16.8 17.0 19.0 18.0 16.6 16.4 15.6Trade deficit -5.5 -4.6 -6.4 -3.9 -4.2 -5.9 -5.0 -3.0 -3.5 -2.3Current account deficit -4.8 -2.8 -7.2 -3.8 -4.1 -7.2 -6.2 -3.1 -4.1 -1.9


Table 4.15 Trends in poverty by ruraland urban areas, 1984-85 to1998-99

(% of households)

Year Pakistan Rural Urbanareas areas

1984-85 22.8 24.1 19.41985-86 19.6 20.7 18.21986-87 17.0 18.1 15.61987-88 16.7 18.2 14.91990-91 21.4 23.5 18.71992-93 24.5 27.4 19.81993-94 23.9 27.9 17.61998-99 32.6 34.8 25.9

Source: 1983-84–1993-94, Ali and Tahir 1999; 1998-99,Qureshi and Arif 1999.

During the 1990spoverty hasincreased, andcurrently 35 percent of householdsin the country arebelow the povertyline


Table 4.16 presents indices of real wagesof informal sector work force and theinformation on unemployment rates.Wages in the informal sector, both farmand non-farm, are flexible and adjust tothe labour use in the economy. Earningsof the workers have remained low in the1990s. The reduced access of the poor tolabour market shown by declining realwages and high unemployment and/orunderemployment rate has resulted fromdeclining rates of economic growth andlow employment elasticity in differentsectors. High inflation also explains thereduction in the purchasing power of thepoor during the 1990s.

Changes in income distribution

Adverse changes in income distributionalso explain the rising poverty during the1990s. Table 4.17 presents the Gini-coefficient, income share of the top20 and the bottom 20 per cent populationin total income and their ratio in 1993-94and in 1998-99. The estimates reveal thatnot only has income distributionworsened during the 1990s but also thatthe income share of the rich increasedwhile that of the poor declined in all ofPakistan in both the urban as well as ruralareas. The worsening disparities inincome combined with low growth haveresulted in worsening of the conditionsof the poor during the 1990s.

In conclusion, it needs to be pointedout that Pakistan’s major failure in the1990s has been the continuing macro-instability, massive slow-down of growthand rising poverty. These reversals

happened despite various attempts atintroducing stabilisation and structuraladjustment programmes. Politicalinstability and lack of political will to bearthe short-term costs of reforms explainthe failure of the reform programmes.Lack of attention to governance issuesand institutional reforms have also playeda major role in the backsliding of thereform process. Pakistan needs tocontinue with the ongoing reformprogrammes, but it must make sure thatthe poor are protected from short-termcosts and the social sector expenditure,particularly on education and skill-training, is increased to improve thequality of its labour.

Bangladesh

At the time of independence in 1971,Bangladesh had adopted socialism as itsideology of development. Most industriesand financial institutions werenationalised or taken over for manage-ment by the government. With the changein government in 1975, policies shifted in

Table 4.16 Indices of daily real wages in informal sectors

Years Carpenter Mason Labour Farm workers Unemployment Underemployment(%) (%)

1990-91 100 100 100 100 – –1991-92 93 102 104 106 5.9 13.21992-93 100 100 100 100 – –1993-94 94 93 92 111 – –1994-95 98 96 100 106 – –1995-96 93 94 100 106 – –1996-97 94 94 100 106 6.1 10.81997-98 94 94 100 – – –

– denotes data not availableSource: Federal Bureau of Statistics, Government of Pakistan.

Table 4.17 Household income distribution by region

Year Area Household Gini Household income shares Ratio of highest 20%coefficient to lowest 20%

Lowest 20% Highest 20%

1993-94 Pakistan 0.40 9.2 40.2 4.4Urban 0.40 9.4 40.9 4.4Rural 0.35 10.6 34.6 3.3

1998-99 Pakistan 0.41 8.1 42.3 5.2Urban 0.41 8.2 42.5 5.2Rural 0.37 7.2 36.2 5.0

Source : GOP 1994; GOP 1999c.


favour of the private sector, but pervasivegovernment interventions throughcontrols or selective incentives remained.A modest effort towards economic libera-lisation was made during the late 1970s.However, serious efforts, especially in theagricultural sector, were made in the early1980s. A three year Structural AdjustmentFacility (1986-87 to 1988-89) andEnhanced Structural Adjustment Facility(ESAF) for the period 1990-91 to1992-99 from the IMF and adjustmentprogrammes with the World Bank andthe Asian Development Bank during the1990s had launched Bangladesh on theroad to stabilisation and structuralreforms.


The adjustment programme initiated bythe government in the 1980s was aimedat reducing macro instability by curtailingthe trade and budget deficits, limitinginflation and achieving a satisfactory rateof economic growth. The programmeincluded cautious monetary and fiscalpolicies, privatisation, liberal trade andindustrial policies and a reform of thefinancial system. At the same time, theprogramme was also supplemented byanti-poverty measures to support thepoorest and the most vulnerable groups.As a result of these early reforms, theeconomy was stabilised. Growth rate hadalso picked up by the mid-1980s.


Due to natural disasters in 1987 and 1988leading to decline in output and increasein government expenditure for relief andrehabilitation, progress achieved in themid-1980s was to a large extentundermined. Recognising thedeteriorating macroeconomic situation,the government had adopted in March1990, a macroeconomic stabilisationprogramme to prevent the fiscal andbalance of payments deficits fromworsening further and causing rapidinflation.

The government attempted to improvethe fiscal balance by reducing currentexpenditure and increasing tax revenuethrough expansion of the tax base andimproving collection and administration.Despite stiff opposition, value-added tax(VAT) was introduced in 1992.

On the expenditure side, whiledevelopment spending on humanresource development and on physicalinfrastructure was emphasised, an attemptwas made to curtail non-developmentexpenditure. This was done to ensure abetter environment for attracting moreforeign capital from private sources,especially FDI.

The monetary policy, which wasgenerally restrictive throughout thedecade, was eased to stimulate economicactivities. The bank rate was reducedfrom 8 to 7 per cent in August 1999 andcash reserve requirements were loweredfrom 5 to 4 per cent in October 1999. Asa consequence, money supply went up bynearly 19 per cent in 1999-2000,compared with less than 13 per cent forthe previous year.


During the 1980s the government hademphasised policies aimed at raisingeconomic growth by reducing the role ofthe government, encouraging the privatesector and attracting foreign investment.As part of a comprehensive set ofstructural reforms, Bangladesh tried tointensify the earlier reforms during1991-96. The government did this byfurther liberalising the foreign trade andexchange regimes, restructuring theindustrial sector, strengthening fiscal andmonetary policies and privatising stateowned enterprises. The major features ofthe reform programme are given below:

Industrial policy reforms

Liberalisation of the industrial sector wasstarted with the announcement of theIndustrial Policy in 1982. This wasfollowed by successive industrial policies


in 1991, 1992 and 1999 to make theeconomy more competitive in aglobalising world. The main objectives ofthese policies were: (a) export-ledindustrial development by making the roleof the government promotional ratherthan regulatory; (b) encouragement ofdomestic and foreign investment inoverall industrial and infrastructuredevelopment; (c) encouragement of onlyefficient import-substituting industries;(d) expediting development of labourintensive industries through acquisitionand improvement of appropriatetechnology; and (e) promotion of privatesector through cost-effective incentivesand privatisation of state-ownedenterprises.

In line with the stated objectives,attempts were made to reducegovernment involvement in industry andto increase the role of the private sector.More than 600 state-owned enterprises(SOEs)—ranging from small to large,commercial to industrial—had either beendenationalised or divested by 1986. InMarch 2000, the Privatisation Board wasconverted into a Privatisation Commis-sion with greater power and flexibility.Around 90 SOEs were targeted forprivatisation through direct sale orstock market flotation. However, thepublic sector still controls over 40 percent of the country’s manufacturing andutility assets. Moreover, as a result ofbureaucratic and labour union resistance,the pace of privatisation has remainedslow despite explicit government policy.

The liberalisation of industrial andinvestment policies during the 1990s hassharply reduced bureaucratic control overprivate investment and has opened upmany areas previously reserved for thepublic sector. Exchange controls wereliberalised for current-accounttransactions; the Board of Investment wasgiven the task of facilitating rather thanregulating investments; and importcontrols were reduced and import permitsabolished. VAT replaced import salestaxes, and most domestic excise dutiesand tariff rates have been simplified and

reduced. In 2000, the highest rate ofimport duty was 35 per cent, although aninfrastructure development surcharge(IDS) of 2.5 per cent, introduced in 1997,has been retained. Import of cottonsynthetic staple fibre yarn and fabrics areexempt from both the 2.5 per cent IDSlevy and the 15 per centVAT. During the 1990s, exports wereencouraged through duty-drawbackschemes and special bonded warehouse(SBW) facilities. The SBW schemes havebeen crucial for the success of the ready-made garment industry. Firms located inexport processing zones (EPZs) canimport capital and raw materials free ofduty, retain foreign currency earnings,employ expatriates and non-unionisedlabour, and enjoy a ten-year tax holidayas well as preferential treatment inobtaining utility connections.


After a slow start in the mid-1980s,Bangladesh’s trade liberalisation effortpicked up pace in the early 1990s as animportant component of the country’sstructural reform programme. Comparedto the highly restrictive and inwardlooking trade regime of the mid-1980s,Bangladesh’s trade policy is now lessrestrictive and more outward oriented(see figure 4.2).

Figure 4.2 Mean unweighted tariff rates (%)


Manufactured products

1989 1999

0 20 40 60 80 100 120 140

All products

Primary products

Bangladesh’s tradepolicy is now lessrestrictive and moreoutward oriented


Initial steps were ad hoc and hadfocussed on removing the quantitativerestrictions. However, in the early 1990sa more comprehensive trade policyreform programme was initiated thatcovered both tariff and non-tariff barriers.Since then Bangladesh has continued toliberalise its trade regime by reducingtariffs and eliminating the quantitativerestrictions on imports.

Bangladesh has made considerableefforts to simplify and rationalise thetariff structure by reducing the numberof tariff bands from 15 in 1992-93 to 5 in1999-2000. The maximum tariff rate hasalso been lowered from 300 per cent to37.5 per cent during the same period. Thenumber of trade-related quantitativerestrictions have also been reduced.However, tariff protection is still high andapplied rates vary widely. The dispersionin tariffs remains high relative to theaverage rate and ranges from 0 to 37.5per cent (World Bank 1999).

The government has also set up exportprocessing zones in different areas toencourage exporters and thereby improvetrade balance. The country’s first exportprocessing zone (EPZ) was built inChittagong in the early 1980s and isdominated by garments manufacturingfirms. The Dhaka EPZ, which specialisesin high-tech firms, was opened in 1993.Up to January 2000, a total of US$413million had been invested in the country’sEPZs, which fetched export income ofUS$711 million, which was 13.4 per centof the country’s total export earnings in1999-2000. A total of 149 firms arelocated in these EPZs, of which 23 percent make ready-made garments and11 per cent textiles, employing 85,238persons.

Besides providing basic infrastructurefacilities (warehouses, communication,water supply, electricity, gas, etc.), thefactories situated within EPZs wereprovided additional incentives such asincome tax exemption for ten years, dutyfree import of raw materials andmachinery, etc., income tax exemptionson salaries of foreign entrepreneurs, etc.


After unifying existing multiple exchangerates in 1992, the Central Bank pursued a‘managed but flexible’ exchange ratepolicy to maintain the competitiveness ofexports while controlling domesticinflation. In 1993, Bangladesh Bank (thecentral bank) liberalised foreign exchangeregulations. The new measures introducedallowed dealers to fix exchange rates. TheBank permitted dealers to retain higheramounts of foreign currency. TheBangladesh currency, taka, was madeconvertible for all current accounttransactions in 1991. Foreigners weregiven permission to invest in the capitalmarket and freely repatriate their profitsand principal. In 1995 the governmentbegan a policy of allowing the value ofthe taka to depreciate against the USdollar. The taka has been devalued instages ever since. The sharpest adjustmentin the value of the taka came in earlyAugust 2000 in response to an earlierdepreciation of the Indian rupee, whenthe taka was devalued by 6 per cent.Although export performance had beenstrong during the 1990s, a morecompetitive exchange rate policy wouldhave had better impact on exports.

Financial liberalisation policy

Despite the Financial Sector ReformProgramme during the 1990s, the bankingsector remains plagued with poor creditdiscipline, inefficient loan recoverysystem, corruption, inefficiency andoverstaffing.

The growth of private banks since the1980s had injected some competition intothe banking sector. There are now 43private banks in the country—29domestic and 14 foreign. Foreign banksare gradually emerging as competitors inthe local deposit and credit markets.There are two bourses in Bangladesh:Dhaka Stock Exchange and ChittagongStock Exchange. The stock market ispoorly developed, with only about 200shares traded.

Major policyinitiatives wereundertaken in theinputs and outputsmarkets for theagricultural sector


Agricultural liberalisation

Being a major contributor to GDP,agricultural sector reforms have beengiven top priority in the structuraladjustment programmes. Themacroeconomic reforms in the area ofremoval of quantitative restrictions ontrade flows, tariff reduction and market-based exchange rate have improved theincentives for the agricultural sector. Inaddition to these reforms, major policyinitiatives were undertaken in the inputsand outputs markets for the agriculturalsector.

The imports of seeds, pesticides andfertilisers were considerably liberalised.The private sector was encouraged toparticipate in the input markets. The ratesof import duties on irrigation equipmentswere reduced. In the case of some inputssuch as fertilisers, import duties havebeen abolished altogether. There has alsobeen considerable deregulation of themarkets for inputs as well as agriculturaloutputs. The subsidy on food crops hasalso been reduced. This process of liftingof quantitative restrictions on imports ofagricultural inputs and the reduction ofduties on imports of such inputs wasundertaken mostly during the 1990s as apart of trade liberalisation reforms. Therehave also been serious efforts at thereform of agricultural research andextension systems and privatisation ofsome of the public sector institutions inthe agricultural sector.

In addition to the crop sub-sectorreforms, livestock and forestry sub-sectors have also been supported bypolicy reform. Bangladesh has a totalforest area of approximately 2.5 millionhectares, covering just over 17 per centof the total land area. In 1999-2000forestry contributed 1.9 per cent to GDPand 9.8 per cent to agricultural GDP andgrew at a rate of 4 per cent. A twenty-year plan is being implemented since 1993to expand forestry and preserve theecological balance.


The reform programme in Bangladeshhad three main objectives: acceleration ofeconomic growth, poverty alleviation andhuman development, and stabilisation ofthe economy. While the success on thegrowth and poverty eradication front hasbeen limited, major success was achievedin the curtailment of fiscal and currentaccount deficits. Stabilisation of theeconomy is an essential requirement forsustained growth rates, but a rapidreduction of fiscal deficits often hasadverse impact on growth as well ashuman development, at least initially. Alow rate of growth, unless accompaniedby specific anti poverty measures, impliesslower reduction in poverty.

Impact on growth

Based on the national account series(in 1985-86 prices), the economy grew atan annual rate of 4.26 per cent during the1980s. This rate went slightly up to4.91 per cent during the 1990s. The creditfor this modest acceleration is said to bedue to the rapid liberalisation process(see table 4.18 and figure 4.3).

During the 1990s, all sectorsexperienced some increase in growthrates, but with a large volatility in themanufacturing as well as agriculturalsectors. The sluggish growth has beenattributed by most analysts to low ratesof savings and investment. Domesticsavings rates increased to 17.8 per cent in1999-2000 from 14.6 per cent in 1991

Table 4.18 Sectoral growth rates ofGDP (% per year)

1980-89 1990-98

GDP 4.26 4.91Agriculture 2.29 3.29Industry 3.64 3.89Services 6.06 6.44

Source: World Bank, World Development Indicators,CD-ROM, 2000


and investment rate to 22.6 per cent from19.7 per cent during the same period. Thepublic investment rate had marginallydeclined.

Agriculture

Agriculture is the largest sector of theeconomy, accounting for 22 per cent ofGDP and 50 per cent of employment.The main impetus for growth in 1990came from agriculture which grew by7.7 per cent in 1990, partly because ofimproved agricultural policies that led toincreased availability of irrigation andadequate supplies of seeds and fertilisers.However in 1995, the GDP growth ratewent down to 4.1 per cent as a result ofdecline in agricultural output. Food grainproduction fell by 1.8 per cent in 1994and by 5.7 per cent in 1995, partlybecause of unfavourable weatherconditions and also as a result ofinfrastructure bottlenecks andinappropriate public interventions in thefertiliser market. In 2000, GDP growthrate went up to 5.5 per cent compared to4.9 per cent the previous year—anincrease that was mainly the result ofgood harvest.

There was increased production ofdifferent varieties of paddy. However,wheat production fell by 3.6 per cent.Total food grain production was 14 percent higher than the previous year.Greater food production at home had apositive impact on the trade balance asfood grain imports fell by over 60 percent. Between 1989-91 and 1998-2000,crop production in the country increasedby 110.4 per cent, food production by114.5 per cent and livestock productionby 136.2 per cent. Given the currenttrend, the agricultural sector which is themainstay of the economy, is expected togrow further.

Industrial growth

The industrial sector of Bangladeshcontributes more than 11 per cent toGDP and employs nearly 12 per cent ofthe labour force (GOB 1996). Itscontribution has increased in recent yearsfrom about 9.9 per cent in 1984-85 to11.5 per cent in 1995-96. Themanufacturing sector has broadened fromits traditional activities of processingtraditional raw materials such as jute andtea to include ready-made garments. Thegarment industry employs nearly1.4 million workers, of which 95 per centare women. Clothing has emerged as themost important export item—comprisingaround 70 per cent of export earnings.However, most of the inputs of thissector have to be imported.

Both foreign and local investment hasbeen increasing in this sector. Foreigninvestment has largely taken placethrough the establishment of foreign-owned enterprises. The largest inflow offoreign direct investment has taken placein the textile sector. However, with thedismantling of the Multi-FibreArrangement, Bangladesh will have toface up to competition from other Asiancountries.

Bangladesh’s jute manufacturingindustry is threatened by the limitedmarket at home and by the growing use ofsynthetic substitutes globally. Added to

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

-15.0

-20.0

-25.0

Figure 4.3 Sectoral growth rates

1990


GDP growth (annual %)

Industry, value added(annual % growth)

1991 1992 1993 1994 1995 1996 1997 1998

Years

Agriculture, value added(annual % growth)

Services, etc., valueadded (annual % growth)


these is the inefficient production of jutegoods. This is because the governmentremains the largest shareholder of manyof the privatised mills.

Stability

The reforms introduced in Bangladesh forreducing fiscal deficit have been mostlysuccessful (see table 4.19). Due to theintroduction and implementation of thevalue-added tax, tax revenue has increasedleading to reduction in fiscal deficit,slower increases in money supply andsharp reduction in inflation. Currentaccount deficit has also been broughtdown due mainly to an increase in themanufactured exports- especially of readymade garments.

Manufactured exports have grownrapidly over the past decade showing anaverage annual growth rate of about17 per cent compared with only 5 percent of GDP at the beginning of thedecade. The growth has been led by rapidexpansion in the ready made garmentindustry. The non-traditional garmentsindustry overtook jute goods as the majorexport earner in 1987-88 and by 1998ready made garments became one of themajor exports of Bangladesh. However,even today ready made garments arehighly import dependent. The juteindustry’s share of total export earningshas fallen from 49 per cent in 1985-86 toless than 10 per cent in the late 1990s.


The incidence of poverty declined from59 per cent in 1983-84 to 45 per cent in1999. The extent of rural poverty hasalways been higher than in urban areas.There has been a declining trend inpoverty in both rural and urban areas.Between 1983-84 and 1995-96, urbanpoverty has declined at a faster rate thanrural poverty. During 1997-1999, ruralpoverty fell but urban poverty hadstagnated at 43.4 per cent (see table 4.20).

Table 4.21 presents data on incomedistribution in rural and urban areas. Thedata shows that income inequality, asmeasured by the Gini index, has increasedin both rural and urban areas. Increasingincome inequality explains the slow-downin poverty reduction during the 1990s, asthe share of income going to the poorfell. The slowing down of povertyreduction is also attributed to lowergrowth of production and loweremployment expansion during the 1990s.Bangladesh’s direct attack on poverty,especially through the non-governmentalorganisations, has been able to providesome cushion here.

In conclusion, Bangladesh has madegood progress in achieving macrostability. With a deepening of economicreforms, the country should be able toaccelerate economic growth, reducepoverty and improve humandevelopment.

Nepal


Nepal had started liberalising its trade andinvestment policies during the mid-1980s.During the early 1990s, widespreadeconomic reforms were started when theIndian economy was substantiallyliberalised. Three years of high fiscaldeficits, causing inflation, made itimperative for the government to initiatethe stabilisation programme. In 1985,Nepal had approached the IMF forassistance. This was followed by structural

Table 4.19 Fiscal and monetaryvariables

Year Fiscal deficit Money supply Inflation rate(% of GDP) (% per year) (% per year)

1973-80 (Average) -9.3 39.6 13.4

1981-90 (Average) -7.5 20.3 10.1

1990-91 -7.9 16.9 9.3

1991-92 -7.2 12.1 8.9

1992-93 -5.9 14.1 5.1

1993-94 -5.9 10.6 1.3

1994-95 -6.0 15.4 1.8

1995-96 -6.8 16.0 3.2

1996-97 -4.5 9.9 2.5

1997-98 -4.2 11.4 7.0

1998-99 -5.3 12.8 8.9

1999-2000 -5.8 18.6 3.8

Source: ESCAP, various issues; GOB 1996.

Table 4.20 Incidence ofpoverty inBangladesh(head countratio %)

Year Rural Urban National

1983-84 59.6 50.2 58.51988-89 59.2 43.9 57.11991-92 61.2 44.9 58.81995-97 56.7 35.0 53.11997 46.8 4.34 46.01999 44.9 43.3 44.7

Source: World Bank, 1998; GOB 1998 &2000.

Table 4.21 Gini Index

Year Rural Urban

1983-84 35.0 37.01988-89 36.8 38.11991-92 36.4 39.81995-96 38.4 44.41997 39.0 43.01999 36.0 42.0

Source: GOB 1998 & 2000.


adjustment loans from the World Bankin 1987 and 1989, leading to a systematicand institutionalised economic reformprogramme of the IMF in the form of anEnhanced Structural Adjustment Facility(ESAF) in 1992.


The major fiscal objectives included anincrease in public savings, a reduction indomestic borrowing for financing of thebudget and an improvement in theefficiency of public expenditure. Fiscaldeficits in Nepal have remained atunsustainable levels with low revenue andhigh non-development spending, resultingin high domestic borrowing. Thedomestic savings rate in Nepal is one ofthe lowest, leading to heavy dependenceon external sources for financinginvestment. As of 2000, the domesticsavings rate was 13.2 per cent of GDP.Domestic investment was in excess of20 per cent of GDP (ESCAP 1999 &2001). External funding to finance thisgap increased from 8 per cent of GDP to10 per cent in 1994 (ADB 1997). In 1999,foreign grants and loans have financedapproximately 65 per cent ofdevelopment expenditures, as comparedwith 50 per cent in the early 1990s (ADB1998).

A number of revenue enhancing andexpenditure control measures have beenintroduced to reduce fiscal deficit. On therevenue side, sales tax and excise dutieswere introduced in 1992. Over the years,these taxes have been increased andrationalised further. The introduction ofthe value-added tax and increase in therate of land taxes are expected to furtherenhance domestic revenues by expandingthe tax base. Several other tax reformsmeasures have been introduced.Privatisation of state-owned enterpriseshas been one of the key policyinterventions, primarily to reduce deficits.

On the expenditure side, a number ofpolicy interventions have taken place.Subsidies have been gradually withdrawnas part of the structural adjustment

policies on fertiliser and bank interest forthe poor.

Auctioning of treasury bills andsecurities from the Central Bank andopen market operations are beingincreasingly used to control domesticliquidity. Despite attempts to control thegrowth rate of money supply, moneysupply has increased at a high rate, risingfrom an annual growth rate of 18.5 percent in 1990 to 21.6 per cent in 1999(World Bank 2001). One of the majorfactors behind this increase has been thehigh level of public borrowing from thebanking system.


The main aims of structural adjustmentpolicies have been to: (a) abolish orreduce controls on capacity creation,production and prices; (b) promotecompetition in the domestic andinternational sector; (c) reduce the role ofpublic sector organisations and agenciesin production and trade, except instrategic sectors or in the case of marketfailures; and (d) liberalise the financialsector by permitting foreign entry andreducing controls in the banking system.Specific details of policy reformsintroduced for Nepal’s integration in theglobal economic arena are given below:

Industrial reforms

The Industrial Enterprises Act 1992guarantees an explicit no nationalisationpolicy of industries in the private sector,provision of one-window system,abolishment of industrial licensing(barring a few industries) and swiftdecisions within thirty days for grantingspecial privileges for export relatedindustries.

The Industrial Policy of 1992 identifiesforeign investment promotion as acornerstone of the strategy to achieve theobjectives of industrial production.Foreign Investment and One WindowPolicy was introduced in 1992 (Acharyaet al. 1998). In the same year, the Foreign


Investment and Technology InvestmentAct was enacted, laying down the rulesand regulations governing foreigninvestment. The aim of the Act is toattract foreign investment in the form ofequity participation, loan extension,technology transfer and direct investmentin domestic production. The broad areasopen for foreign investment includemanufacturing, agro-based energy andservice industries (except public healthand environment). Nepal encouragesforeign investment as joint ventureoperations with local investors. As regardsequity participation, foreign investors arepermitted to own up to 25 per cent ofthe stock of listed companies and 100 percent ownership for small and mediumindustries (Khan 2000). Returns oninvestment and amount received aspayment of principal and interest onforeign loans in convertible currencies isguaranteed for repatriation. The disputesettlement mechanism of the Act allowsfor international arbitration in accordancewith the prevailing arbitration rules of theUnited Nations Commission onInternational Trade Law (Mahendra2000).

The privatisation process began in1992, with the passage of the PrivatisationAct (Acharya et al . 1998). A number ofgovernment owned industries in areassuch as sugar, jute, cement and paperhave been privatised. Privatisation ofpublic monopolies in telecommunicationsand air travel is under consideration,allowing multinational companies a sharein the development of cellular telephonesand long distance communications.


Trade policy reforms, initiated in 1992,introduced currency convertibility on thecurrent account, duty drawback facilitiesfor export industries and the introductionof foreign exchange accounts. The aimof the export duty drawback scheme is toprovide a refund on taxes paid on itsimported raw materials. The bondedwarehouse scheme has facilitated tax

refunds paid on imported raw materialsfor the exports of ready-made garmentindustry. Export service fees on exportshave been reduced from 2 per cent in1993-94 to 0.5 per cent to date. All taxespaid on the exports are refunded (Acharyaet al . 1998).

Customs tariffs have also undergonerationalisation and simplification. Thepeak tariff rate has been reduced from ahigh of 300 per cent in the early 1980s to80 per cent in 1997-98. In addition, thetariff structure has also been simplified,with tariff slabs brought down from10 to 5 in 1995-96. In addition, additionalduties charged on third country importshave been abolished.

The Foreign Exchange Regulation Act1962 prohibited local banks fromextending loans in foreign currencies.However, as of 1993, a provision hasbeen introduced allowing commercialbanks to extend loans in convertiblecurrencies to export oriented industries,firms and producers for the import ofraw materials.

Under the Structural AdjustmentProgramme, the Open General Licences(OGL) have been expanded in scope andimport licenses have been categorised intothree divisions namely industrial OGL,commercial OGL and import licenseauction. In order to enhance industrialproduction, entrepreneurs receive foreignexchange entitlement based on pastproduction levels and current estimatedproduction. Commercial OGL has aidedin improving the supply of raw materials,impacting positively on production andexport of woolen carpets. Moreover, thepolicy has resulted in the removal ofimport and export licenses, removal ofimport restrictions, replacements of tariffswith quotas, and the ability of banks todetermine import cash margins.Furthermore, the Central Bank nowrequires only a 2 per cent deposit of thetotal value of letter of credit. As aconsequence, the trade regime is nowmore open and liberal as quantitativerestrictions on imports have beenabolished.


Agricultural reforms

The government has liberalised bothinput and output markets in theagricultural sector. With effect from 1997,subsidies on all kinds of fertiliser, excepturea, have been removed, importsliberalised and private companies and theAgricultural Inputs Corporation (AIC)have been allowed to avail of the ureasubsidy (Abdelati et al . 2000).Furthermore, as part of the reformprocess AIC’s monopoly on the importand distribution of fertiliser has beenended in order to encourage a greater rolefor the private sector. The transportsubsidy extended to the AIC fordistribution to remote regions has alsobeen discontinued. Prices of chemicalfertilisers have been deregulated at thewholesale and retail levels. In thedistribution of food grains, the role ofthe state-owned Nepal Food Corporationis being modified to foster private sectoractivity.

The government has introducedreforms to strengthen agriculturalresearch, extension and training systems.As part of this reform process, thegovernment also aims to strengthenpublic institutions, use a decentraliseduser-oriented approach to research,focussing on the needs of farmers in eachspecific district, strengthen coordinationmechanisms and maintain linkages withrelevant international research institutes,and targeting high potential areas forextension. However, according to a 1998report, the extension reforms have beenlimited, with only 12 out of the country’s75 districts targeted (Abdelati et al. 2000).


Nepal’s currency is pegged to the Indianrupee. The exchange rate policy has beenconsiderably liberalised to attract FDI.The Foreign Exchange Regulation Act[FERA] 1962, was amended allowingforeign institutions, agencies, individuals(except those from Bhutan, India andNepal) to operate US dollar and pound

sterling accounts. Five additionalcurrencies were added by 1993. Thisprovision permits industrial producers,and companies engaged in the exportsector to obtain loans in convertibleforeign currencies. The Nepalesecurrency, the rupee, was made partiallyconvertible in the current account in1992, with 35 per cent to be surrenderedat the official rate and 65 per cent to besold at the market rate. By 1993 fullconvertibility for the current account wasintroduced. However, some minorcontrols were re-imposed in 1998-1999and 1999-2000. (Abdelati et al. 2000). Thecommercial banks are permitted toundertake foreign exchange transactionswithout the permission of the CentralBank.

Financial liberalisation policy

The financial sector has been liberalisedin phases. In May 1986, commercialbanks were permitted to set deposit ratesabove a specified minimum. Exceptingpriority sectors, banks could also set thelending rates. In 1989 the banks weregranted full authority to set the depositand lending rates according to the markettrends. In 1993, the Statutory LiquidityRequirement (SLR) was reduced, leadingto a reduction in lending rates.

Commercial banks are now not forcedto invest in government bonds andtreasury bills with low yields. This hasfurther eased liquidity constraints forcommercial banks. In 1988, a mechanismof auctioning treasury bills wasintroduced. An inter-bank market wasalso set up to utilise the short-term excessliquidity of banks.

The Commercial Bank Act of 1974,amended in 1984, has removed the entryand exit barriers for banks so that jointventure banks with foreign collaborationcould operate in the private sector(Acharya et al. 1998). The aim was toattract foreign capital and technical know-how into the economy, infuse modernbanking skills to the domestic banks andwiden the national financial structure.


Prudential norms for the long-termsustainability of the financial system wereintroduced which include capital adequacyratio, loan classification, loan lossprovisioning, income recognition andsingle borrower limit. The capitaladequacy ratio requires banks to maintain4 per cent core capital and 4 per centsupplementary capital (Abdelati et al.2000).

A Credit Information Bureau wasestablished in 1989. The Bureau isresponsible for preparing creditinformation. Capital market reforms werealso introduced. Promotional andoperational functions were bifurcated in1992 with the establishment of a SecurityExchange Board to oversee regulatoryfunctions, and the setting up of the NepalStock Exchange Centre with theresponsibility for operational and tradingfunctions.


The data base for Nepal’s economy is notstrong enough to make an objectiveassessment of the reform strategy.However, we provide below some generalinformation based on availableinformation.

Impact on growth

Table 4.22 presents the averageperformance of different sectors duringtwo time periods, 1980-89 and 1990-98.Figure 4.4 shows annual growth rates ofdifferent sectors.

A signifiant increase in the rate ofgrowth in GDP is found as it rose from3.7 per cent during the 1980s to 4.8 percent during the 1990s. However, abreakdown of growth by sectors showsthe weak impact of reforms in productivesectors. Agricultural sector and industryboth show a slow-down. Only servicesshow a sharp acceleration. The yearlyvariations on the growth rates shown inFigure 4.4 are large. The slowdown inagriculture is based on a decline in theuse of fertiliser and pesticides. This has

been attributed to the sharp increase inthe prices of inputs due to the removalof subsidies. Between 1991-92 and 1999-2000 the use of fertiliser has experienceda decline of 35 per cent. At the sametime, improved seed provision for majorfood crops has declined by 367 metrictons, from 2153 metric tons in 1991-92to 1786 metric tons in 1999-2000 (HMGNepal 2000). The removal of subsidieson inputs was not accompanied by publicinvestment in rural infrastructure. Thisexplains the sharp decline in agriculturalperformance.

The weak performance in the industrialsector is due to numerous enterprisesbeing forced to close down asliberalisation policies were introduced.Industrial and trade policy reforms havehad an adverse impact on industrialproduction. Effective protection rates

Table 4.22 Average annualgrowth rates (%)

1980-89 1990-98

Agriculture 3.59 2.57Industry 7.8 7.2Services 3.6 6.2GDP 3.7 4.8

Source: World Bank, World DevelopmentIndicators CD ROM, 2000.

Figure 4.4 Sectoral growth rate and GDP


1998

1997

1996

1995

1994

1993

1992

1991

1990

-2 0 2 4 6 8 10 12 14 16 18

Growth rate (%)

Services etc., value added(annual % growth)

Agriculture, value added(annual % growth)

Industry, value added(annual % growth)

GDP growth (annual %)


have declined from 98 per cent in 1989to 9 per cent in 1996 (Khan 2000).Moreover, the manufacturing sector wasconstrained by a limited domestic market,lack of infrastructure, skills, capital andstiff Indian competition. The beneficialimpact of opening up to the world otherthan India was not achieved due to hightransport costs.

Impact on stability

Macro-economic stabilisation has been amajor issue in Nepal. Fiscal deficit, tradeand current account imbalances havebeen large and negative. Despite fiscalreforms, not much improvement hasoccurred in the fiscal balance. Tradedeficit has been large. Receipts fromtourism have had a positive impact onthe current account, however, currentaccount deficits continue to remain high.Foreign direct investment has not been amajor source of support to the balanceof payments.


Since the onset of liberalisation policiesin Nepal, negative trends have beenobserved on income distribution,unemployment and underemployment.While there has been a shift inemployment away from agriculturetowards the industrial and service sectors,the creation of employment opportunitieshas not kept pace with the increasingnumbers of young people entering the jobmarket. Distribution of income in Nepal

has become increasingly unequal between1984-85 and 1995-96. As shown inchapter 3 (table 3.2), the richest 20 percent of the population in Nepal has44.8 per cent of GDP, while the poorest20 per cent has only 5.9 per cent. Thisincome inequality has been associatedwith increased inequality in rural areas.

The labour force engaged in agriculturehas declined, but it still remains the sectorwith the highest rate of employment.However, most of the underemployedlabour force remains in the agriculturalsector. At the same time, the labour forceengaged in the non-agricultural sector hasexperienced an upward trend with themajor growth sectors being construction,transport and communications. Most ofthis expansion has been associated withthe service sector. On the other hand, asthe employment in the service sector hasgrown accounting for greater non-agricultural employment, the level ofemployment in the manufacturing sectorhas been lower in the liberalisation periodat 17.2 per cent (Rijal 2000).

Prices of food grains and agriculturalinputs have increased, mainly due to fiscalmeasures, such as the removal ofsubsidies. These fiscal measures haveaffected the rural population by reducingagricultural output and incomes andraising the prices of food as thisconstitutes an important part of theconsumption basket for these people.Increase in poverty is attributable tostagnation in growth and rise in foodprices. Poverty has been accentuated asthe integration with the global economyhas imposed limitations on the extent ofpublic expenditures for the welfaremeasures.

In sum, Nepal’s growth record duringthe 1990s has been high relative to the1980s. In fact, it has increased from3.7 per cent during the 1980s to 4.8 percent during the 1990s (World Bank 2000).But agricultural growth significantlydecelerated during the 1990s, comparedto the previous decade. The growth inagriculture has also fluctuated widely. Therate of industrial growth has also declined,

Table 4.23 Trends of macro-economic indicators (as % of GDP)

Current account deficit Trade deficit Fiscal deficit

1990 -6.9 -8.8 -10.01991 -7.8 -11.1 -10.71992 -7.9 -10.5 -8.61993 -7.9 -10.3 -9.21994 -5.6 -7.1 -7.01995 -7.8 -9.1 -6.61996 -11.7 -15.2 -7.51997 -9.4 -10.2 -7.31998 -8.8 -10 -7.7



though only slightly. But the servicesector has grown significantly. The fiscaldeficit, which was 11 per cent of GDP in1991, has been brought down. But it isstill quite high and unsustainable. Currentaccount and trade imbalances have beennegative and high. These imbalances haveworsened during the 1990s. The decadeof reforms has seen an increase in thelevels of income inequality both in ruraland urban areas. Poverty situation hasalso worsened due both to risinginequalities and declining growth inagriculture and industry.

Liberalisation policies to-date have hada limited impact on the growthperformance. Merchandise exports havea concentration in two major goods,namely, ready made garments and woolencarpets. The ready made garments sectorfaces an uncertain future in view of theabolition of the Multi-Fibre Arrangementby 2005. Nepal has great potential toboost export earnings, by utilising itshydroelectric potential, establishinglinkages with the software industry inIndia and further encouraging tourism.

Sri Lanka


Since 1977 globalisation, liberalisation andprivatisation constitute the three coreelements of the economic reforms carriedout by different governments. While theeconomy has been liberalised graduallyover the last twenty-five years, there havebeen certain watershed years for differentreform initiatives. The initial reforms of1977 had transformed the economicsystem and the incentives structure in anattempt to create an enablingenvironment for the private sector.Tariffs, trade restrictions and taxes werereduced. Prices were deregulated.Business was freed of unnecessarycontrols and regulations. Foreign capitalwas encouraged with generous incentives.But increased macro-economic instabilityand violence during the early 1980s hadprevented the reaping of full benefits

from the 1977 reforms. A second roundof reforms was initiated in 1989 tostrengthen the reform process.

Stabilisation programme

The 1977 liberalisation reforms wereaccompanied by large infrastructureprojects during the early 1980s. Thelargest donor-funded project undertakenwas the Accelerated MahaweliDevelopment Programme. The large sizeof Public Investment Programme hadimplicit in it enlarged budget and currentaccount deficits. As a result of macroimbalances, inflation had accelerated.Export incentives had deteriorated.Private investment activity did not pickup. The ethnic violence and politicalinstability had further made mattersworse. The government expenditure onsecurity had increased sharply. Somedevelopment projects with high rates ofreturn were deferred. Both stability andgrowth was kept on hold.

The government was forced in 1989to embark on a new stabilisationprogramme with the help of donoragencies. The government expenditurewas to be substantially reduced throughlarge cuts in public-sector jobs. A tightmonetary policy was sought to be pursuedthrough high interest rates and reductionin credit to the private sector. Currentaccount deficit was to be reduced from10 per cent of GDP in 1989 to about5 per cent of GDP in 1993. Thestabilisation measures were comple-mented with a further dose of economicliberalisation policies.

Structural reforms

Structural reforms were initiated in anumber of major policy areas which arebriefly reviewed below.


The trade reforms have attempted toliberalise the imports and foreignexchange transactions. There was a sharp

While the economyhas been liberalisedgradually over thelast twenty-fiveyears, there havebeen certainwatershed years fordifferent reforminitiatives


reduction of import items subject tolicensing and quota restrictions. There hasalso been a reduction and rationalisationof import tariffs. Both the level anddispersion of import duties have beenreduced over time. Current accountconvertibility was achieved in early 1990sfor the foreign exchange transactions.The capital account transactions were andare still subject to controls.

The Presidential Trade and TariffCommission, appointed by thegovernment in 1997 recommendedfurther changes to the tariff structure.Some of the changes approved were,(i) all industrial raw material andmachinery not manufactured in Sri Lankacame under the 5 per cent band; (ii) dutyon imports of motor cars and jeeps,which were under the duty range of50-100 per cent, was reduced and unifiedat 30 per cent; (iii) import duty onagricultural products remained at 35 percent to allow the domestic agriculturalsector to adjust to a lower tariff regimeover the medium term; and (iv) itemsconsidered to be essential for themaintenance of minimum living standardswere kept at zero tariff rate.

Export promotion measures have alsobeen introduced. Tax holiday, previouslyapplicable only to firms in the exportpromotion zones, was extended to anyexporter who fulfilled the criteriaannounced by the government. Inpractice, the whole export sector hasbecome free of taxes.

Foreign exchange rate reforms

A unification of the exchange rate andmanaged float was introduced as a partof reforms. The policy of managed floatin the exchange rate determination hadled to a gradual and consistent practiceof depreciation of the Sri Lankan rupeeto maintain international competitiveness.The rupee has depreciated from Rs.15 inthe late 1970s to Rs.76 in 2000. Recentexchange rate reforms were aimed atrecapturing most of the competitivenessthat Sri Lanka had lost due to the sharp

devaluation of the currencies in East Asiain the Asian crisis in 1997. The currencycrisis in East Asia had little direct impacton the Sri Lankan rupee mainly due toexisting capital account controls and smallexposure of the country to short-termdebt. Yet there was a need to takemeasures to avoid the adverseconsequences emanating out of the crisis.The Central Bank had stepped up itssurveillance on bank operations and usedmoral persuasion to counteract excessivespeculative forces.

According to the analysis done by theCentral Bank, devaluation of the currencywas important to protect the profitmargin of exporters that had beengradually eroded. Sri Lankan rupee wasconsidered overvalued by exporters. Adevaluation of the currency was effectedby the Central Bank as a part of its policyof managed float.

Market reforms

A series of reforms were introduced toencourage the role of private sector inthe economy. Areas reserved previouslyfor the public sector were opened up tothe private sector. The sole presence ofgovernment in import and domestic tradewas ended. Private bus transport has beenallowed to ply in competition with thepublic transport system.

The role of market forces has beengiven greater salience in the workings ofpublic corporations. Price controls havebeen eliminated for most goods andservices. Labour market reforms have alsobeen introduced to let the low-wageeconomy work according to marketforces. The powers of trade unions havebeen reduced.

Fiscal reforms

A number of reform measures on boththe tax and expenditure sides of thebudget have been introduced. A degreeof fiscal discipline has been introduced inthe budgetary process. Untargetedsubsidies on food and fertiliser have been

Price controls havebeen eliminated formost goods andservices


eliminated. Expenditure on social sectorslike education and health was drasticallycut. Initially after the 1977 reforms,especially during the early 1980s, capitalexpenditure on major infrastructureprojects was increased. Subsequently, thedictates of reducing fiscal deficit hadforced the government to curtail itscapital expenditure.

Agricultural policy reforms

While Sri Lanka has traditionally been anagricultural economy, the contribution ofagricultural sector to total GDP has beendeclining. It has fallen from 50 per centin 1950, to 38.5 per cent in 1960, to 23.2per cent in 1990 and to around 20 percent in 1999.

With the liberalisation of the economyin 1977, the traditional agricultural sectorhas been subjected to major reforms inthe 1990s, with the emphasis on a greaterrole for market forces. Tenurial reformand land distribution was carried out toimprove access to land, food and incomefor the indentured workers. About 20 percent of the land was distributed to theland-less in small blocks of 1/4 to oneacre in size. The reform package included(i) ownership of tea plantations revertingto private companies; (ii) freeingagricultural markets and liberalisingexternal trade in agricultural commodities,thus providing price incentives leading toenhanced investment and output in thesector; (iii) rationalisation of the tariffregime and granting of import licensesfor agricultural commodities werereplaced by a tariff system in 1996; and(iv) the introduction of duty free importof seeds and planting material.

Efforts have also been made toincrease productivity in plantationagriculture—tea, rubber and coconut.This sector is currently under privatesector management and ownership. Majorreforms of the plantation sector namelyin tea, rubber and coconut began in 1992,when management (but not land orassets) was privatised. Tea Small HolderDevelopment Authority continued to

assist the tea industry by implementingsubsidy schemes for replanting and newplanting of tea, and providing extensionservices. In 1995, the government of SriLanka began privatising regional holdingcompanies. The government sold 20plantation management companies in1995-98. In 1998, tea and rubberplantation workers were given asubstantial wage increase. Two new wageagreements contained a formula for profitsharing which affords the plantationcompanies the flexibility to weatherdownturns while also protecting theinterests of the labourers.

Industrial reforms

The private sector-led, export-orientedindustrialisation strategy continued to bethe top most priority for industrial sectordevelopment in the country. This strategyaimed at expansion, diversification andupgrading of both the domestic andforeign firms in matters related tophysical and manpower resources,employment and income generation andpromotion of regional industrialisationfor sustainable industrial development.

The government offered a range ofincentives in 1998 for the location ofindustries in backward regions. As aresult, private industrialists opened upfifty new garment factories in thesouthern provinces. Textile and clothing,food, beverage and tobacco processing,and chemical, rubber and petroleumproducts were the main beneficiaries ofthese new incentives.

Fiscal incentives and other reforms forindustrial growth include: (i) selling off36 state-owned industrial enterprises;(ii) tax holidays being replaced by a15 per cent concessional rate of tax forall investments; (iii) fiscal incentives wereoffered under the Advanced TechnologyProgramme; (iv) developments werecarried out in telecommunications andinfrastructure facilities under the regionalindustrial parks programme. The majorflaw of these policies, however, was theheavy import-dependence of the

Traditionalagriculture sectorhas been subjectedto major reforms inthe 1990s, with theemphasis on agreater role formarket forces


manufacturing sector, whose domesticvalue-added content was just a little overone-third of total value.

The structural problems in theindustrial sector, such as continuinglabour market rigidities, inadequatedevelopment of infrastructure, speedytransportation and communicationsystem, roads and security relatedproblems still persist despite somereforms in these areas. The introductionof free market oriented labour reformsare necessary to further enhanceproductivity and to create employmentopportunities for the educated youth toresolve the unemployment problem.

Financial sector reforms

Sri Lankan government policy ofprivatisation and deregulation had asignificant impact on the revival of capitalmarkets. In continuation of otherfinancial reforms during the 1991-99period, the government has shown itscommitment to liberalise the moneymarket. The reform package includes:(i) lowering of interest rates by reducingthe statutory reserve ratio from 15 percent to 12 per cent in 1996; (ii) newmeasures to raise finance such as a GlobalDepository Issue, forms of leveragedbuyouts and emergence of derivatives;(iii) foreign ownership of equity andrelevant exchange controls onremittances; and (iv) the creation of anappropriate regulatory environment. Ithas been realised by the government thathealthy macroeconomic environment andpolitical stability are both necessary forstrong and sustained growth in thesemarkets.

The financial and banking reformsover the period of 1990-99, encompassedb road mac ro i s s u e s i n c l u d i n g :(i) improvement in competitive bankingand encouraging private sector in thedevelopment of financial system; and(ii) the 1995 amendments in the BankingAct, strengthening the regulatory powersof the Central Bank of Sri Lanka (CBSL)and extending its mandate beyond

commercial banks to specialised banks,foreign currency banking units, and ruraldevelopment banks. CBSL setsappropriate limits for foreign exchange.

The banking system has been openedto foreign competition. There is no limitto the number of branches a foreign bankmay open. However, foreign ownershipof domestically incorporated banks islimited to 40 per cent.

Privatisation

In Sri Lanka, the privatisation process waspresented as a ‘peoplisation’ programme.A two stage process was envisaged. Thestate enterprises were first restructured inthe form of public companies. A part ofthe shares of these companies were thenfloated on the stock exchanges. Thispolicy was followed by an ambitiousprogramme of privatisation in whichsome of the public companies were soldto the private sector.

Anti-poverty programme

The early liberalisation process in the1980s was perceived by rural and urbanpoor as benefiting mostly the upper andmiddle income classes. By the end of the1980s, the government had launched anumber of policy initiatives to address theconcerns of the poor. The cash value offood stamps was doubled. Programmesfor school uniforms and midday mealswere launched. Garment factories werelocated in rural areas by various incentivemeasures to generate employmentopportunities in the rural areas.


The reform programme in Sri Lanka hadthree main objectives, i.e., acceleratinggrowth, stabilisation of the economy andreduction of poverty and unemployment.The Fund-Bank style of reforms currentlyin vogue imply an initial period of slowgrowth due to recessionary elements within the prescribed package. The Sri Lankaninitial reform of 1977 were not strictly

In Sri Lanka, theprivatisation processwas presented as a‘peoplisation’programme


guided by the stereotyped package ofreforms as the design of such packageswas evolved in later years. However, thereforms introduced during the 1990s hadcontained the stabilisation objectives inthe conditionalities agreed between thedonors and the government.

Impact on growth

Unlike the other countries in South Asia,Sri Lanka has had longer experiences witheconomic reforms as it started the reformprocess in 1977. Its growth rate rose from3 per cent per annum from 1960 to 1976to an average of 4.1 per cent during1980-89 and to a still higher value of5.2 per cent during 1990-2000. Table 4.24shows the average performance ofdifferent sectors in the two reformdecades. Table 4.25 shows the yearly ratesof growth by sectors for the decade ofthe 1990s.

The beneficial impact of reforms ongrowth is obvious. However, Sri Lankahas grown at a lower rate in the post-reforms period than other countries inEast Asia and South Asia did during theirtransformation period. As against thegrowth rate of 5.2 per cent in Sri Lankaduring the 1990s, countries in East Asiahad experienced growth rate of 9 per centper year during 1960-1990. The relativelylower growth in Sri Lanka when the worldeconomy was growing fast and worldtrade was expanding rapidly is due to lowlevel of investment and lower efficiencyof the economy.

The performance of the economy hasalso varied over time as well as betweendifferent sectors. The positive impacts of1977 reforms were neutralised by ethnicconflicts during the second half of 1980s.The second wave of reforms during1989-1993 had, however, resulted in anacceleration of annual growth rates,although with fluctuations Thefluctuations in agricultural productionwere more marked than in industry andservices sectors. The average growth rateduring the 1990s at 5.7 per cent wasslightly higher than the average growth

of 5.3 per cent during the 1980s. Theindustrial sector performed well duringthe 1990s. While import liberalisation hadcertainly undermined several domesticindustries, the restructured industrialsector had resulted in a higher growthrate for the entire industrial sector duringthe 1990s compared to the 1980s.

Agriculture

The agricultural sector decelerated duringthe 1990s as the average growth rate fellfrom 2.4 per cent per year during the1980s to 1.8 per cent during the 1990s.There were large fluctuations in theannual growth rate in the sector with twoyears recording negative growth. Allsub-sectors within agriculture, i.e., smallsubsistence holders, plantations andcommercial farming, had experiencedslow growth. Between 1994 and 1998,domestic agriculture had witnessed asharp decline in production mainly as aresult of globalisation and free trade inagricultural commodities. The flood ofimports of most commodities had erodedthe incentives for agricultural producers.

Impact on stability

Relatively low growth during the 1990s,especially in the agricultural sector, wasassociated with high macro-imbalances.Table 4.26 shows the fiscal, trade andcurrent account deficits. The high levelsof deficits have imparted a source of

Table 4.24 Growth rate ofGDP (% per year)

1980-1989 1990-2000

GDP 4.1 5.2Agriculture 2.4 18.4Industry 4.2 7.2Services 5.3 5.73

Source: World Bank, World DevelopmentIndicators CD-ROM 2000.

Table 4.25 Growth rates of GDP and sectors during 1990s(% per year)

Years GDP Agriculture Industry Services

1990-91 4.6 1.9 4.1 6.21991-92 4.3 -1.6 7.1 5.31992-93 6.9 4.9 9.8 6.31993-94 5.6 3.3 8.1 5.21994-95 5.5 3.3 7.8 5.11995-96 3.7 -4.6 5.6 5.81996-97 6.4 3 9.1 7.11997-98 4.7 2.5 6.3 5.21998-99 4.3 4.5 4.4 4.21999-2000 6 1.2 9.7 6.9



considerable instability in the economy.The high trade deficits were a result ofpoor performance of agricultural exports.While globalisation had helped the growthin exports of the garments and otherindustrial products, the agriculturalexports had increased slowly. Theimports, however, had increased muchfaster than the exports leading to aworsening of trade deficits. The currentaccount deficits were smaller than thetrade deficits due to remittances and otherinvisible receipts.

Fiscal deficits had remained highduring the period 1990-91 to 1999-2000,never falling below -7.3 per cent of GDP.Fiscal deficit in 1999-2000 was -9.8 percent. The extra expenditure related toethnic conflicts as well as revenue lossesfrom reduced rates of taxes explain the

high fiscal deficits. The requirement ofkeeping the budget deficit in check tomeet the conditions imposed by thedonors has meant a drastic cut in capitalexpenditure (see table 4.27).

The proportion of tax revenue in GDPhas fallen from 17.8 per cent in 1995 to14.5 per cent in 1998. The increasingdefence expenditure during the 1990s wasfinanced not from the increased level oftax revenues but by cutting essentialeconomic and social expenditures. Whilethe expenditure on social services hasstagnated, the expenditure on economicservices has fallen drastically. It is notsurprising that there was no majoracceleration of growth rate in agriculture.The government capital expenditure didnot provide enough support to even theprivate sector.


In South Asia, Sri Lanka was well-knownfor its commitment to social welfare.Larger allocations for humandevelopment and social programmes hadbrought substantial income equality andpoverty alleviation in the country duringthe early decades after independence.Despite the commendable long-termtrend in poverty reduction, however, alarge part of the population remainsvulnerable to income fluctuations. Therate of poverty reduction has fallen duringthe 1990s. The recent adverse impact onpoverty is attributed to deterioration interms of trade during the 1990s andslower growth performance. The ongoingethnic conflicts, drought in 1996, declineof agricultural productivity, and labourunrest probably explain the low growthin agriculture. The statistics on povertyshow that the percentage of householdsbelow the poverty line had declined from31 per cent in 1985-86 to 20 per cent in1990-91, but poverty rose again to 25 percent in 1995-96.

Income poverty remains high in SriLanka with at least one-fourth of thepopulation living below the poverty line.Southern province is the poorest in terms

Table 4.26 Macro-economic indicators

(% of GDP)

Year Budget Trade Currentdeficit balance account

balance

1990-91 -11.6 -11.1 -5.41991-92 -7.3 -10.8 -4.51992-93 -8.4 -11.1 -3.81993-94 -10 -13.3 -6.51994-95 -9.6 -11.6 -4.91995-96 -8.9 -9.5 -3.91996-97 -7.9 -8.1 -2.61997-98 -9.2 -6.9 -1.41998-99 -7.5 -8.7 -3.61999-2000 -9.8a -10.8a -6.4a

a: denotes provisional dataSource: Central Bank of Sri Lanka, Annual Report 2000.

Table 4.27 Functional classification of capital expenditure(% of GDP)

Expenditure 1994 1995 1996 1997 1998

Total capital 7.5 7.4 5.7 5.7 6.8expenditure

Economic services 5.1 5.1 4.1 3.6 4.4Agriculture and 0.9 0.9 0.6 0.4 0.6

irrigationTransport 2.5 2.8 1.6 1.5 1.9Energy 1 0.7 0.8 0.8 0.9Social services 1.3 1.5 1.3 1.3 1.5Education 0.5 0.5 0.6 0.5 0.6Health 0.3 0.3 0.3 0.3 0.4

Source: Central Bank Annual Report 1998 as cited in Economic Review, April-May 2000.


of per-capita income and has the highestunemployment rate. In rural areas,poverty is high among both agriculturaland non-agricultural households. Mostfarm families are poor, surviving on lessthan two acres of land and deriving over40 per cent of their income from off-farm sources. The inhabitants of ruralareas also live without access to safe waterand sanitation (30-50 per cent), andelectricity (65-75 per cent). The poorsuffer most from low-quality socialservices, with acute disparities in the ruralareas where health, education, housingand safe water and sanitation services arefar below the national average.

Despite numerous poverty alleviationprogrammes in the country the growingpoverty in Sri Lanka shows that povertycannot be reduced or overcome by thepoor themselves. The poor have to beprovided with opportunities to link theirproductive activities with the widereconomy. If the government believes thatthe poor should benefit from the marketeconomy, then anti-poverty programmeshave to be linked with the productiveemployment plans.

The continued persistence of povertyis explained by high unemployment rateswhich stood at 14.1 per cent in 1987, 14.7per cent in 1993 and 11.3 per cent in1998. The employment growth rateduring 1987-96 was 1.7 per cent per yearwhile the growth rate of real wages hasbeen –0.4 per cent per year during 1990-98. It is not surprising that unemploymentand poverty has not been reduced muchdue to declining real wages and weakemployment creation.

Since the onset of globalisationpolicies, negative trends have also beenobserved in the pattern of incomedistribution. In 1995, the share of poorest20 per cent in consumption was 8 percent while that of the richest 20 per centwas 42.8 per cent. This ratio hasdeteriorated for the poorest 20 per centrelative to the situation in the 1970s.

In brief, Sri Lanka is the most market-oriented economy in South Asia. Thereforms in Sri Lanka have a long history.

The impact of reforms on economicperformance has been positive but not ashigh as some countries in East Asia orSouth East Asia. The impact on humandevelopment in terms of povertyreduction and employment generation hasbeen negated during the post-reform eradue mainly to internal strife. The securityrelated expenditure has squeezed theexpenditure on capital expenditure andsocial sectors. The agricultural sector hasperformed in an unsatisfactory manner asits growth rate has been reducedconsiderably during the 1990s.

Conclusions

The previous sections have described thereforms that the South Asian countrieshad undertaken in the 1990s to integratewith the global economy and haveassessed the major impacts on growth,macro stability and poverty andemployment—the two key componentsof human development. As the discussionof these issues was carried outsequentially for the five countries, thisconcluding section attempts to identifythe commonalties and differences in theglobalisation experiences in South Asia.The future prospects and promises ofglobalisation conclude the discussion.

With the exception of Sri Lanka, whichstarted its reform process in 1977, allother South Asian countries are still inmid-stream of comprehensive reformprogrammes of liberalisation andstabilisation The conclusions on thepattern and results of reform aretherefore preliminary. However, the inter-country comparisons are still useful.

The pace, sequencing and timing ofreforms has varied between countries butthe decade of the 1990s has proved to bea turning point in South Asia for thereform movement. Sri Lanka has gonethrough a second wave of reforms whileall other countries have shown a strongconsensus and commitment to reforms.India has led the reform process with theintroduction of wide-ranging reforms in1991 and extending the scope of such


reforms throughout the decade. Thesequencing of some reform measures hasbeen defective as it has added to thedifficulties in other interrelated policyareas. The obvious case in this regard hasbeen the reduction of tariffs beforereforming the tax systems to widen thebase and improve tax collection. Therevenue loss from the tariff reforms hasbeen a major contributor to high fiscaldeficits. Similarly, financial sector reformsrelating to the curtailment of governmentborrowings from the banking system atlow costs were introduced before anymeaningful restructuring of the public-sector expenditure. This has increasedfiscal deficits in Pakistan and India. Whilethe reform of the financial sector wasneeded, the sequencing of financial sectorreforms was not appropriate. The recentefforts at tax and expenditure reforms inall countries are expected to correct theearlier policy failures. It is interesting tonote that, in line with the neo-classicalperspective, the content of reforms in allcountries had over-emphasised the roleof price incentives and marketorientation. The institutional innovationsand the role of non-price factors in thereform programmes were given a lowpriority.

The economic performance during thereform era varies considerably bothbetween countries and over time for eachof the countries in South Asia. India hasbeen a star performer. From onlynegligible growth in 1991-92, it hasattained high growth of over 7 per centin GDP for three consecutive yearsbetween 1994-95 to 1996-97. There hasbeen a loss in the growth momentum but,with reforms, it is expected that India cangrow at a higher rate. Bangladesh has notseen much acceleration in growth ratesduring the 1990s. Nepal’s growth rate at3.6 per cent per annum has been lowerthan that of Bangladesh but it has showna slight acceleration over its own growthrate of the previous decade. In the caseof Pakistan, the growth rate during the1990s has fluctuated between 1.9 per centand 7.8 per cent in 1996-97 and 1991-92,

respectively. Fluctuations notwithstanding,there has been a definitive slow-down ingrowth due primarily to lack ofimplementation of reforms, politicalinstability, external shocks includingadverse changes in weather and sanctions.Sri Lanka’s growth rate in the early 1990shas improved as a result of the secondwave of reforms. However, the growth inSri Lanka has faltered in the second halfof the 1990s due primarily to the ongoingcivil strife.

In terms of the contribution ofdifferent sectors to growth, agriculturehas performed poorly in all countries inthe 1990s. Adverse weather shocks do notexplain the slow growth. The lack ofemphasis on agricultural reforms andreduced allocations of funds foragricultural and rural developmentprovide a better explanation to the dismalperformance of agriculture in South Asia.Industrial sector and some of the servicesub-sectors, especially informationtechnology in India, have done extremelywell in the 1990s.

Macro instability has been a majorconcern in South Asia. All countries haveexperienced high fiscal deficits as aproportion of GDP. Contractionary fiscalmeasures have reduced the fiscal deficitsin all countries, except Sri Lanka. Limitedrevenue mobilisation and lack ofexpenditure control have been the majorcauses of continuing high fiscal deficits.

Balancing external accounts is crucialfor stability as well as to build capacity tocontinue implementing the reformprogrammes. Trade and current accountbalances have remained negative for allSouth Asian countries during the 1990s.India’s position has been relatively morecomfortable and Nepal’s has been themost difficult one throughout the decade.Despite increased FDI flow to Sri Lankaand India, South Asia has not been apreferred region for attracting major FDIflows. Regional conflict and weak reformefforts probably explain the sluggishinflows of foreign capital to South Asia.

The impact of reforms on humandevelopment in South Asia has been

Economicperformance duringthe reform era variesconsiderably bothbetween countriesand over time


mixed. The allocation of funds to socialsectors has seen no major upwardrevision. The employment expansion innone of the countries has been significant.The rates of unemployment and/orunderemployment remain high. With theslow down of growth in Pakistan and nomajor acceleration in the growth rates inother countries except India, poverty ratesin South Asia have remained high. InPakistan, the poverty rates have almostdoubled during the 1990s. In India andother South Asian countries, the earlierprogress in poverty reduction has beenhalted in the 1990s.

The setback to growth and humandevelopment in South Asia in the 1990sis a matter of serious concern. However,the prospects of rapid improvement inhuman well-being are bright. It requires,among many other things, a rethinking ofthe globalisation process so that theshort-term costs of economic reforms are

not borne mainly by the poor who donot have a voice in decision-making.Acceleration of growth with humandevelopment and poverty reduction is arealistic expectation in all countries. Peacein the region and cessation of internalstrife could make South Asia an attractiveregion for foreign investors. Withincreased trade orientation and FDIflows, South Asia can get access toforeign markets, resources andtechnologies. There is also a need toincrease the intra-regional trade in SouthAsia. The existing large cross-borderillegal trade between some countries inSouth Asia is an abundant proof of theuntapped potential of intra-regional trade.With progressive legislation of this trade,political friction between countries can bereduced drastically. The next chapteraddresses this issue of regionalcooperation.


BLANK

104

South Asia and Regional Cooperation 105

5South Asia and Regional

Cooperation

SAARC leaders should agree on anumber of concrete measures toopen up their markets to each otherand to the rest of the world…(And)SAARC should call on theinternational community to assisttheir efforts by providing muchlarger access to world exportmarkets, greater inflow of foreignprivate investment, and largerexternal assistance. The SAARCleaders should offer the world theirown plan for human developmentand poverty reduction which canthen become the basis for a viableglobal compact.

– Mahbub ul Haq


Two dominant forces have been shapingthe world economy during the last quarterof the 20th century—globalisation andregionalisation. Regional economicintegration has occured simultaneouslyand is linked to the process ofglobalisation. The General Agreement onTariffs and Trade (GATT) and itssuccessor organisation, World TradeOrganization (WTO) had recognised therole of Regional Trade Agreements(RTAs) in the world economy.Multilateral trade liberalisation had led toan exponential growth of the worldeconomy, benefiting many nations, yet itbecame clear from the protests by thecivil societies from both North and Southin Seattle and in other places thatincreasing trade openness was imposingtremendous short-term costs todeveloping as well as some sectors of thedeveloped countries. Regionalcooperation is seen by the participatingcountries as a countervailing power intrade negotiations with the countriesoutside the region, besides providingopportunities to benefit from trading withthe neighbours.

The question that the developingcountries, including South Asia, face isthe precise role of regional cooperationin the rapidly globalising world. In viewof the large gains from multilateral tradeliberalisation, South Asia needs to

continue on the trade liberalisation front;this does not stand in the way ofenhanced regional cooperation. In thischapter, we try to look at the nature andthe extent of current regional cooperationin South Asia, and how should westrengthen this in order to enhance thecollective bargaining power of South Asiain global forums.

World trade has grown at an averagerate of 6 per cent over the past decade orso, at twice the growth rate of worldGDP. On January 1, 1995, the WTOreplaced GATT, which dealt only withtrade in goods, and included in itsmandate to monitor and implementagreements on commodities, services, andintellectual property rights, and amechanism for dispute settlement. Nowwith more and more countries becomingmembers of the GATT/WTO (see figure5.1), global trading order is what WTOrules make it to be. In 1999, more thantwo-thirds of the 140 members (as on30 Nov. 2000) of the WTO weredeveloping countries with havingapproximately a 20 per cent share ofworld exports. This has wide-rangingimplications for the global economy.

Regional trading groups

Looking at the current trend in formingregional trading blocs, we see that nearlyall of the WTO’s 140 members havenotified participation in one or moreRegional Trade Agreements (RTA)—customs unions, free trade areas or otherpreferential arrangements. In the period1948-1994, the GATT received 124notifications of RTAs (relating to tradein goods), and since the creation of theWTO, 90 additional arrangementscovering trade in goods or services havebeen notified. Out of the total of 214

Chapter 5

South Asia and Regional Cooperation

Figure 5.1 Members of GATT/WTO160

140

120

100

80

60

40

20

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Source : WTO and MHHDC staff calculations.


agreements and/or enlargements so farnotified to the GATT/WTO, 134 aredeemed to be currently in force. Thenetwork of RTAs throughout the worldis now highly complex and manycountries are members of severalagreements, sometimes with verydiffering rules.

The unprecedented rise in the numberof Regional Trade Agreements in the lastdecade (see figure 5.2) has led to a criticalanalysis of the merits of regional tradingagreements in relation to the unbridledpush towards a multilateral tradingsystem. It is important to acknowledgethe obvious gains in terms of tradevolume and welfare effects for bothdeveloping and developed countries inextending their trade to the marketsworldwide. In India, a new middle classhas emerged that is ready and able topurchase goods from the developedcountries. While the global market is stillnot entirely competitive, many developingcountries are now able to expand theirexports to developed markets. Inaddition, other ostensible gains, such asproductivity gains, due to the applicationsof research and technology, mostlydeveloped in industrial countries, arehighly important in an open world. Astudy shows that a net increase inoutput of US$ 25 billion was observed in77 countries that could be attributed tointernational R&D spillovers (Coe et al.1997). This suggests that gains from thisfactor would be even greater as tradebarriers come down worldwide. Yet thecase for forging regional alliances isgaining new ground: witness theformation of Free Trade Association ofthe Americas (FTAA), set for 2005, whichwill be the largest trading bloc, with34 member countries, in the world.Global trade will no doubt be thedominant driving force of the globaleconomy. But the question is what kindof complementary role the regionaltrading groups could play in this tradingregime? And what will be the impact ofthis on the vast majority of poor peoplearound the world?

There are, in general, four mainmotivating factors for forging regionalalliances. These are: (i) to promoteeconomic cooperation among themembers of the group by increasingefficiency and exploiting economies ofscale; (ii) to achieve internationalcompetitiveness during globalisation;(iii) to build a sense of security and tofacilitate political harmony within aregion; and, (iv) to forge a collectivebargaining position in global negotiations.During the last two decades there was aproliferation of regional alliances aroundthe world. In Asia, there is the Asia-Pacific Economic Cooperation forum(APEC), the Association of South-EastAsian Nations free trade area (ASEAN),and a pact between Australia and NewZealand, ANZCERTA. In the mid-1980s,South Asian Association for RegionalCooperation (SAARC) was formed. Inthe Americas, apart from the NorthAmerican Free Trade Area (NAFTA), wehave seen the creation of the SouthernCommon Market in the South America(MERCOSUR), and now a Free-TradeArea of the Americas (FTAA). OutsideAsia, the most advanced is the EuropeanUnion (EU). At the moment, the EU issecond to APEC with a 35.5 per centshare of total world exports in 1998.APEC, with a share of 45.3 per cent ofworld exports is the largest trading blocwith 21 member countries including theUnited States, Japan and China.

There is considerable debate over thenature and future of these regionalalliances under the auspices of the WTO.As to their future role, it is not certainwhether their recognition in the WTOframework, via Article XXIV, is to attractexisting regional blocs to enter the WTOmembership, or merely to promote theexistence of such regional (preferential)trading blocs as a complementaryinstrument to the working of WTO.Another view is that the Article XXIV ofthe WTO may, at a later date, translateinto a phasing out mechanism for theseregional blocs. And as to their nature,some insist on calling these alliances

Figure 5.2 The number ofRTAs notified toGATT/WTO eachdecade

140

120

100

80

60

40

20

01950-59 1960-69 1970-791980-891990-2000

Source : WTO and MHHDC staffcalculations.


‘preferential’ rather than ‘regional’ or ‘free’trade agreements. It is also argued whetherthey are ‘building blocks’ or ‘stumblingblocks’ towards a more integrated tradingworld. As America considered embracingregionalism in the early 1980s, the threatof such a move led EU to enter the GATTtalks. The same thing happened in the1990s when the rise of APEC persuadedthe EU to bring the Uruguay Round to aclose. Furthermore, it is also argued thatpreferential trade agreements within aregion could be counterproductive, byeliminating tariffs on imported goods fromsome countries but not from all others ina region. Preferential trade agreements alsocreate a ‘spaghetti bowl’ of overlappingRules of Origin that are sure to distortsome investment decisions. A recentsurvey concluded that regionalarrangements ‘seem to have generatedwelfare gains for participants, with small,possibly negative spillovers onto the restof the world’ (World Bank 1999c).

South Asia’s trade outside the region

A host of economic and political factorshave so far limited trade within the SouthAsian region. Although informal tradebetween India and Pakistan is said to beover the one billion US dollar mark,official trade among SAARC countriesaccounts for less than 4 per cent of theirtotal trade volume. The trade policiespursued in these countries have tendedto discourage intra-regional trade on theone hand and encouraged trade with thedeveloped world on the other. Theregion’s principal export destinations arethe United States, the European Union,and Japan (see table 5.1).

For South Asia as a whole, the EUand the USA are very important as anexport market. Both EU and the USabsorb the bulk of the textiles andgarment exports from South Asia. Studieshave shown that any trade diversion oftextiles and garment exports to the USmarket due to the formation of NAFTAwill be minor, and this will be more thanoffset by the new trade created by theabolition of the Multi Fibre Arrangement(MFA) in 2005 and the US tariffreductions under WTO (Safadi and Yeats1993) (see box 5.1). However, it is alsoargued that the use of non-tariff barrierscan limit the market for South Asia.

At present, Japan’s formal relationshipwith South Asia is primarily one ofofficial aid. SAARC has been receiving

Table 5.1 Direction of exports as a % of total exports in 1998

EU USA Japan Industrial Countries SAARC

Bangladesh 46 36 2 87 2.7Bhutan - - - - -India 27 21 5 57 5.6Maldives 24 34 9 68 18.4Nepal 33 26 1 61 36.5Pakistan 31 22 3 60 5Sri Lanka 29 38 5 76 2.6SAARC 29 24 5 42 5.3

Source : IMF, Direction of Trade Statistics 1999.

In 1993, the single market became areality for the European Union. Sixyears later the Euro, a single currencyfor the region, came into being. Overin the Americas, the entry of Mexico, adeveloping country, within NAFTA wasalso witnessed. As these two regionscombine to form a significant part ofSouth Asia’s export markets, suchdevelopments in these regions cannotbe ignored.

Greater tariff escalation as aconsequence of the Single Market

Box 5.1 Will progress within EU and NAFTA affect SAARC?

Programme of the European Union insome industries such as leather, textilesand clothing has placed South Asia at adisadvantageous position in the EUmarket. The preferential removal oftrade barriers for Mexico, withinNAFTA, will result in a diversion ofSouth Asia’s exports particularlytextiles, clothing and leather, in favourof Mexico. Moreover, the liberalisationof cross-border trucking by NAFTAwill reduce transportation costs, whichwill favour Mexican products over non-

NAFTA products in the US market.However, it is argued that Mexico’s

ability to displace third country importsin North America is limited. The importpenetration ratios of Mexico in theareas of textile and clothing are muchsmaller than the countries of SouthAsia. Also, a relatively large portion ofthe Mexican MFA quota remainedunfilled indicating supply sideconstraints that limit the ability ofMexico to displace third countryexports.

Source: Khan and Mahmood 2000.


approximately US$ one billion annuallyin the form of bilateral aid since thesecond half of the 1980s. A SAARC-Japan Special Fund has also beenestablished to stimulate support forSAARC economic cooperation.

Trade: SAARC vs. other regional blocs

Among all the regional groupings,SAARC ranks very low in terms of intra-regional trade (see table 5.2). Trade withinthe region is very low and insignificant,averaging around 4 per cent during thepast three decades. This indicates limitedtrade complimentarities within the region.The region constitutes a small market forthe products of SAARC membercountries. In ASEAN, in contrast, tradecomplimentarities are greater as intra-regional exports form over 20 per cent ofthe region’s total exports.

In terms of global trade too, SAARCranks very low among regional groupings(see table 5.3). As a percentage of globalexports, SAARC accounted for only oneper cent in 1999 compared to 38.9 percent by EU, 18.8 per cent by NAFTA,1.3 per cent by MERCOSUR, and 6.5 percent by ASEAN. These figures havehardly changed compared with the pre-SAARC era. Obviously, SAARC’seconomic cooperation has not beentranslated into any impressive results inthe global context.

There are many reasons for suchinsignificant trade within the SAARCregion. On the political side, the mainobstacle to greater trade integration hasbeen the tension between India andPakistan, and to a lesser degree, fear ofIndian trade domination by her smallerneighbours. For example, Bangladesh hasa sharply rising trade deficit (as percentageof GDP) with India since 1993. This isdue to India’s non-tariff barriers, such as,local government rules and regulationsthat become major obstacles to theexports of Bangladesh. In the case of SriLanka, which has a free trade agreement(FTA) with India, the trade balance is

believed to be 13 to 1 in favour of India.On the Indian side, the obstacles havenot been removed, whereas Sri Lanka hasfacilitated the entry of Indian goods underthe FTA. While intra-regional trade is notgrowing, SAARC member states aremaking free trade pacts with otherregions.

On the economic side, perhaps themain inhibiting factor has been a lack ofcomplimentarity in the exports of SAARCmember countries. The four major SouthAsian nations export a similar basket ofcommodities, and often compete directlyin third markets, especially for textiles.Furthermore, India’s economic pre-ponderance and comparative advantage ina range of products have resulted inasymmetric trade relations with herneighbours, hindering regionalintegration. Regional trade has alsoperhaps not taken off because all thecountries in the region have beenpursuing, until the late eighties, importsubstitution policies aimed at promotingdomestic industries. Lastly, lowtechnological growth and demand withinthe region itself, and historical trade linkswith the developed countries, haveresulted in extra-regional patterns oftrade.

It is important to stress thefundamental importance of a regionaltrading bloc to enhance the capacity ofits members, both individually andcollectively, to cope with the challengesof globalisation. It is also important touse this vital instrument of cooperationto consolidate the region’s gains from theglobalisation process.

Table 5.2 Exports within the regional trade blocs (as % of total exports)

1970 1990 1995 1999

APEC 57.8 68.3 71.9 71.9EU 59.5 65.9 62.4 62.6NAFTA 36.0 41.4 46.2 54.6MERCOSUR 9.4 8.9 20.3 20.5ASEAN 22.9 19.8 25.4 22.2SAARC 3.2 3.2 4.4 4.7

Source : World Bank, World Development Indicators 2001.

Table 5.3 Total exports byregional tradeblocs (as % ofworld exports)

1980 1999

APEC 33.7 46.9EU 41.0 38.9NAFTA 16.6 38.9MERCOSUR 1.6 1.3ASEAN 3.9 6.5SAARC 0.7 1.0

Source: World Bank, World DevelopmentIndicators 2001.


SAARC and economic cooperation

Recognising the value of regionalcooperation in both economic and non-economic spheres, and despite beingconfronted with some of the most intensepolitical issues, the seven South Asiancountries formally launched the SouthAsian Association for RegionalCooperation (SAARC) on 7th December1985. It was a historic event and signifiedthe culmination of the process that beganas early as 1978-79 with the late PresidentZia-ur-Rahman of Bangladesh initiatingconsultations in the matter with hiscounterparts in South Asia.

The main objectives laid down in theSAARC Charter adopted at the firstSummit are to promote the welfare ofthe peoples of South Asia; accelerateeconomic growth and social progress;promote active collaboration in theeconomic, social, cultural, technical andscientific fields; strengthen cooperation ininternational forums on matters ofcommon interest; and cooperate withinternational and regional organisationswith similar aims and purposes. Decisionson all matters of SAARC are taken onthe basis of consensus. Article X (2) ofthe SAARC Charter excludes bilateral andcontentious issues from the ambit ofSAARC.

Ten SAARC Summits have been heldso far (see box 5.2). Since its inception,SAARC has been involved in severalprogrammes and projects. The firstSAARC Summit held in Dhaka (1985)focussed on non-economic areas forregional cooperation. The twelve agreedareas of cooperation in the IntegratedProgramme of Action (IPA) were:agriculture; education and culture;environment; health and population;meteorology; prevention of drugtrafficking and drug abuse; ruraldevelopment; science and technology;communications; tourism; transport; andwomen in development. It was not untilthe seventh Summit in Dhaka in 1993that a framework agreement on SAARCPreferential Trading Arrangement

(SAPTA) was signed. The eighth Summitin New Delhi in 1995 directed that allnecessary steps should be taken tofacilitate the ratification by all memberstates and operationalise SAPTA by theend of 1995.

The ninth SAARC Summit, held inMale (May 1997), established animportant body, the Group of EminentPersons (GEP). The GEP was toundertake a comprehensive appraisal ofSAARC, identify measures to furtherenhance the effectiveness of theAssociation and formulate a long-rangevision and perspective plan of action,including a SAARC Agenda for 2000 andbeyond. They submitted their report‘SAARC Vision Beyond 2000’ to thetenth SAARC Summit held in Colombo(July 1998). The GEP’s recommendationsfocussed on three areas: (a) regionaleconomic integration, includingnegotiation of a treaty for a South AsianFree Trade Area (SAFTA); (b) theadoption of a Social Charter for SAARC;and (c) the reform of SAARC institutions.It also envisaged a SAARC CustomsUnion, with harmonisation of externaltariffs by 2015, and a SAARC EconomicUnion, with harmonisation of monetaryand fiscal policies by 2020. The groupalso suggested a South AsianDevelopment Fund (SADF) to financedevelopment activities in the leastdeveloped member states.

At the tenth SAARC Summit, SAARCleaders accepted two of the three GEP’smain recommendations. These are: (i)negotiation of a Treaty for SAFTA, and(ii) the adoption of a SAARC SocialCharter. The leaders agreed to set up aCommittee of Experts for drafting acomprehensive treaty for SAFTA by2001. The first meeting of the Committeeof Experts was held on July 15-17, 1999in Kathmandu. An intergovernmentalExpert Group is to be set up tocommence work on the Social Charter.There was, however, no consensus on thelong term goals of a SAARC CustomsUnion by 2015 and SAARC EconomicUnion by 2020.


SAPTA

On April 11, 1993, the SAARCPreferential Trading Agreement (SAPTA)was signed. In the economic sphere ofSAARC, this was the most prominentachievement. It formally came intoexistence in December 1995, well inadvance of the date stipulated by the sixthSummit in Colombo in 1991. The mainobjective of SAPTA is to expand tradeand economic cooperation amongst themember states through reciprocalexchange of concessions or preferencesfor both tariff and non-tariff restrictionson imports from member countries, witha view to distribute benefits equitablyamong all South Asian states (see box5.3). It is believed that such preferenceswill lead to an increase in such importsand promote mutual trade, and thuscontribute to the economic developmentof the member countries.

The Agreement, which took effect inDecember 1995, was very cautious andwas based on product-by-product tariffreductions. In the first round of tradenegotiations (SAPTA-I), a 10-25 per centpreferential reduction in tariffs was agreedupon on only 226 items by all countries.Indeed, members even reserved the rightto withdraw concessions at any time. Formost countries, the intra-regional trade inthe commodities on which they offeredconcessions initially was not more than 5per cent of their total exports. Besidesbarring some offers made in favour ofthe least-developed member states, thepreferential margins were very small.

The second round of trade negotiations(SAPTA-II) saw the number of commodi-ties for concession rise to 1868 and afterSAPTA-III the number almost doubled to3456. The fourth round of tradenegotiations plans to look at deeper tariffconcessions on actively-traded products,removal of discriminatory practices andnon-tariff barriers on items which havebeen granted tariff concessions.

Despite these efforts, South Asia’sintra-regional trade has not picked up.Why is that?

The Reality of trade under SAPTA

Intra-regional trade within the SAARCcountries is affected by a number ofeconomic as well as non-economicfactors, such as:• Similarity of products and process. As mostof the economies are based on agricultureand their technological advances asregards production processes are not verydifferent, they produce very similar items.Thus the preferential trade agreementmay not necessarily lead to highervolumes of intra-regional trade withinSAARC.

Box 5.2 SAARC: A calendar of events

1981 – Colombo First formal meeting of the foreign secretaries of theregion for venturing into institutionalised regionalcooperation was held.

1983 - New Delhi The second stage towards regional cooperation wasmarked with the convening of the meeting of the foreignsecretaries. The Integrated Programme of Action (IPA)was launched here through the declaration of the SouthAsian Regional Cooperation (SARC).

1985 – Dhaka The first SARC Summit was held and the heads of stateor government decided to establish South AsianAssociation for Regional Cooperation (SAARC). For thefirst eight years of its existence, hardcore economicissues, such as trade, industry, money and finance wereto be kept outside the scope of cooperation underSAARC.

1991 – Colombo An Inter-Governmental Group (IGG) was set up toformulate an agreement to establish a SAARCPreferential Trading Agreement (SAPTA) by 1997.

1993 – Dhaka The framework agreement on SAPTA was finalised.SAARC and UNCTAD signed a Memorandum ofUnderstanding too.

1995 - New Delhi SAPTA formally came into existence, well in advance ofthe date stipulated by the Colombo Summit. The SAPTAprovided for a transition to a South Asian Free TradeArea (SAFTA). Earlier it was envisaged that SAFTAwould be achieved by the year 2005. Three rounds ofnegotiations have taken place under SAPTA. In the lastround of negotiations, a total of 3456 commodities wereoffered for tariff concessions.

1997 – Male At the Summit, the heads of state or government decidedto bring forward the date of achieving SAFTA to 2001.

1998 – Colombo The tenth Summit decided that deeper tariff concessionsshould be extended to products which are being activelytraded or are likely to be traded among members, inorder to accelerate the progress in the next round ofSAPTA negotiations.


• Consumer demand . Some of the goodsproduced on a large scale in certainSAARC countries do not appear to meetthe required consumer demand of theimporting SAARC country. For example,as Pakistan is not a tea producer, it offersa large market for tea exports ofSri Lanka, India and Bangladesh.However, a large part of Pakistan’s tearequirement is imported from outside theSAARC region, such as Kenya, becausethe kind of tea required by Pakistan isnot produced in adequate quantities inthe SAARC region.• Product quality. Sometimes it is the lowerquality of products produced within theregion that leads some countries toimport goods from outside the region,even though the prices outside the regionmay be higher.• Market limitation . Sometimes thisbecomes a major obstacle. Intra-regionaltrade can suffer because of political and/or geographical considerations. Forexample, geography limits the markets forNepal and Bhutan, being land-lockedcountries they have to trade mostly withIndia. On the other hand, politicaldifferences between India and Pakistanhave kept the trade between these twocountries at a very low level.

However, if all trade in South Asia isfully liberalised and tariff levels arelowered, then preferential tradeagreements under SAPTA become lessmeaningful and would not particularlyhelp in enhancing intra-regional trade. Inthis context, it is important to note thatpreferences given from a low tariff regimeare less meaningful and significant thanthose from a high tariff regime. Forexample, a 50 per cent preference for a60 per cent tariff level will bring downthe preferential tariff level to 30 per cent,whereas a 50 per cent preference on a12 per cent tariff level will bring the newtariff level down to 6 per cent. Clearlythe effect on prices of the latterpreference is less than the former.Similarly, if imports have few restrictions,the question of preference does not arise.

Transportation and communication links withinSAARC

Within the South Asian region, serviceindustries in the sub-sector oftransportation and communication are stillquite primitive and in their technologicalinfancy, and tend to be restricted by theirtime-old practices, and restrained by lackof investment. In the transport sector,there are direct flights from Colombo toEurope, Middle East and South East Asiancountries, but within SAARC at least onechange-over is required for flying fromColombo to Bangladesh or Nepal. Thehigh costs of airfreight also hinder the freeflow of cargo by air. On thetelecommunication sector side, there isover-usage and congestion during businesshours. A letter can take about two weeksto go from Sri Lanka to Nepal.

The slow port facilities are anotherimpediment to free flow of trade. Anaverage Indian port takes about twenty-two days to deal with the cargo ships,whereas the average for other East orSoutheast Asian ports is about twelvedays. It takes over ten days to clear cargofrom the port of Colombo, but in Dubaiships are cleared within five hours afterarrival. Airfreight cargo in Dubai iscleared in three hours! Thus, thegeographical proximity of SAARCmember countries is negated byinefficiency, delays, lack of properfacilities and inadequate flights, air andsea routes and shipping services.

Pros and cons of preferentialarrangements

Of the various existing preferentialtrading arrangements on the internationalscene, the most meaningful have been thearrangements within the Latin Americancountries. The regional agreements withinAfrica and Middle East in recent yearshave not been very successful. In the caseof ASEAN, the intra-regional trade as ashare of world trade declined among theASEAN countries before 1990, at a

• Overall reciprocity andmutuality of advantages.

• Step-by-step negotiations andperiodic reviews so as toimprove and extend thepreferential trade arrange-ment in stages.

• Inclusion of all products, raw,semi-processed and pro-cessed.

• Special and favourabletreatment to least-developedcountries (Bangladesh, Bhutan,Maldives and Nepal).

Box 5.3 SAPTA principles ina nutshell


period when the items under the tariffpreferences were increased to over 20,000by 1990. It is because of the slowprogress of the ASEAN preferential tradearrangement that the countries decidedto move towards the establishment of afree trade area during the Summit meetingin January 1992.

The Bangkok Agreement, encompass-ing Bangladesh, Sri Lanka, India, Laosand Republic of Korea, emerged in theearly 1980s, but over the last fifteen totwenty years intra-regional trade hasdeclined as a share of their world trade.In fact, the very imports that had beengranted tariff preferences declined invalue during the period 1981-86, and foralmost half of the preferential items therewas no record of imports from theirmember countries. The reason cited forthe low level of trade was that there wasno political will. This apparently seems tobe the case with the SAARC as well.

What really has to be identified iswhether the preferential tradearrangements within South Asia arethemselves an effective tool for creationand growth of intra-regional trade, orwhether historic relations, religiousdifferences, political attitudes and issuesof sovereignty play the deciding role?Furthermore, preferential tradearrangements focus on market access viatariff reductions. Markets can be accessedmore easily if tariff reductions are notfollowed by interim ancillary duties orpara tariffs. Also the existing non-tariffbarriers (NTBs) stand in the way. On theother hand, the removal of NTBs is onlyworthwhile if they are applied frequentlyand to the actively-traded goods withinthe region.

Custom duties and tariffs generally donot include various other charges such aslanding, port and warehousing chargesand surcharges. Sometimes these are fairlysignificant and negate the lower or notariffs, thus neutralising the effects oftariff removals. As a result, the businesscommunity within SAARC tends to loseconfidence in the tariff reductions underSAPTA.

Rules of Origin need to be an integralpart of preferential or free tradearrangements. They determine that noagreements are violated by geographicallocation of industries to bring theirproducts within the preferred regions. Ifthe Rules of Origin decree that at least 40per cent of a product must be from thecountry selling the product then iteliminates or reduces the misuse oflocation by the stronger producingcountries to infiltrate through SAPTAinto large and concessional markets.

Due to the existence of a fairlysubstantial amount of illegal trade withinthe SAARC region, lowering of tariffbarriers may not immediately make amajor impact on the volume of officialtrade. The incidence of illegal trade onregular trading is a problem for mostpreferential trading arrangements. InASEAN, there is a substantial amount ofillegal trading, such as most exports fromIndonesia to Singapore find their waythrough the informal sector, and theseare not reflected in the various annualtrade statistics. Even if the informal tradesector is diverted to the formal sector itwill not denote fresh and increasedtrading but will only show up as part ofthe existing trade. The strength of apreferential trade agreement lies in newtrade creation and not merely in creatingtrade diversion.

Some policy issues for SAPTA

Trade preferences include both tariff andnon-tariff preferences. Most preferentialtrade agreements established in the worldhave worked on tariff reductions onspecific goods that do not face non-tariffbarriers. Large tariff concessions aremeaningless if the import of the item isseverely restricted on other grounds. Infact, this is one of the reasons forhindering trade within a preferential tradegrouping. The countries, while providingeach other tariff preferences with onehand, restrict their imports with the otherhand. In any preferential trade agreementif tariff concessions are combined with

Due to the existenceof a fairly substantialamount of illegaltrade within theSAARC region,lowering of tariffbarriers may notimmediately make amajor impact on thevolume of officialtrade


non-tariff concessions, it will be moreeffective in facilitating mutual trade.However, even under such a frameworkthe following two conditions should bemet: (a) tariff cuts should be significantso as to make a marked impact on theimported price, and (b) trade preferencesshould cover a large number of items ofcurrent and potential trade value in orderto cover a reasonably large area of trade.

Preferential trading arrangementscould be stimulated by applying twostrategies. One strategy could be to firstwork bilaterally within a regionalframework on a selected group ofcommodities and then extending thesystem to the entire region. This approachis known as ‘gradualism’, and was firstadvocated by the father of economics,Adam Smith. The Australian-NewZealand Closer Economic RelationsTrade Agreement is an important modelwhere all tariff and quantitativerestrictions affecting bilateral trade for alarge list of commodities were eliminatedgradually during the 1983-1990 period. Inthis Agreement, trade liberalisation wasbased upon the principle of a ‘negativelist’ whereby reciprocal concessions wereextended across-the-board to all thecommodities, with the exception of aninitial list of sensitive items to beliberalised eventually. The bilateral freetrade area thus created between Australiaand New Zealand proved to be veryeffective in increasing trade.

The second strategy could be adoptedby a region that could attract externalfunding and investment. For example, inthe case of ASEAN, despite slowprogress in trade under the preferentialtrading arrangement, the stimulant thatenhanced regional trade to a level of16 per cent, was extra-regional investmentand support from Japan. Japaneseinvestment and support invigorated thedormant economies in the region. This inturn stimulated trade under thepreferential trading arrangement.

There are enough economic reasonsfor advancing intra-regional trade andcooperation in South Asia. Direct trade

in such products as steel and aluminium,textile machinery, chemical products, anddry fruit, currently being diverted throughthird countries, will benefit all countriesquite substantially in terms of price,quality, and time. Besides, many goodsbeing imported at high costs from othercountries can be made available fromwithin SAARC. Specific tradecomplimentarities need to be created inorder to foster greater intra-regional tradein South Asia. Promising prospects forimmediate intra-SAARC trade expansionexist in such products as tea and coffee,cotton and textiles, natural rubber, lightengineering goods, iron and steel, medicalequipment, pharmaceuticals, and agro-chemicals.

In the context of SAFTA, policymakers of member countries are going toface a tough time. First, they are going tocome under a tremendous pressure fromvarious private sector lobbies. Importersof a product will support tariffliberalisation while producers may lobbyagainst it. Secondly, some items will beincluded in the negative list purely forrevenue considerations. Thirdly, thenegative list must be justifiable on goodgrounds to other member countries.Given the fact that the size of thenegative list is not well defined in theSAPTA agreement, a likely scenario isthat of a very large negative list beingsubmitted by member countries andconsequently having only a few productsunder free trade with zero tariffs. Such ascenario will not help in moving quicklytowards a custom union or a commonmarket.

Benefits of regional cooperation

The history of policymaking in the regionimplies that often pure trade levels andflows are less central to decisions thanother issues such as income distributionand poverty alleviation. With this in mind,the debate then turns to what should bethe optimal trade policies for South Asiancountries with regard to each other, andthe rest of the world.

There are enougheconomic reasonsfor advancing intra-regional trade andcooperation inSouth Asia


A study establishing the link betweentariffs and transport costs for neighboursconsidering trade liberalisation found thatincreasing intra-regional trade can avertlarge transport costs associated withinternal trade in the larger countries andwith partners outside of the region(Srinivasan 1993). This will benefit alltrading partners unambiguously. It alsofound that new trade in goods andservices can be generated that could havea significant growth-enhancing effect. Itis pointed out however, that multilateralliberalisation would be much morebeneficial to each of the individualcountries. It further revealed that whileregional liberalisation would benefit allcountries, the effect would be largest forthe smaller economies of the region.

In South Asia, there are some sectorswhich have traditionally been seen asareas of potential cooperation that couldvery well be strengthened by regionalintegration as opposed to multilateralliberalisation. India has a clear revealedcomparative advantage in iron ore andPakistan in vegetable and fruits, forexample. Furthermore, there is no doubtthat cooperation in sectors such as energyand electricity could be substantial. It isevident that during periods of high priceinflation of energy resources, energyimports lead to negative effects onoutput, terms of trade, debt and evenincome distribution. The benefits ofalleviating this dependence on foreignenergy sources by regional trade areunambiguous. In addition, there ispotential for trade in manufactured inputsthat would dampen energy price shocks.There is also enormous potential forhydropower cooperation given that theHimalayan rivers flow throughBangladesh, Bhutan, Nepal, India, andPakistan.

There can be significant gains bothfrom increasing intra-regional trade aswell as from trade outside the region.While economic gains would result fromeither policy, it is perhaps more importantto recognise that the major benefits fromintra-regional trade and cooperation

would be political. According to a study,a political agreement that reduces tensionsand hostilities in the region, therebyreleasing resources for development andpoverty alleviation may very well be moreimportant than multilateral liberalisationinitiatives (Thakur 1994). Therefore, apreferential trade arrangement, eitherinitially between India and Pakistan or asa regional effort, can be mutuallybeneficial, not only in its direct economiceffects but also in tackling non-economicbarriers. It also needs to be pointed outthat rough estimates of the value ofsmuggled and third-country goodsimported from India into Pakistanapproach US$ one billion and that similarPakistani imports into India could wellpush the value of trade up to US$ 2-3billion.

There is every reason to believe that apreferential trading agreement in theregion at a pace suited to all the countriescould secure welfare gains and increasetrade flows at least until it is clear thatmultilateral liberalisation as a commitmentof all WTO members is being practisedby all members. After all, it is true thatregional agreements exist in all parts ofthe world: NAFTA and the EEC, amongothers, are coexisting peacefully amidstcalls for globalisation.

If South Asian countries remain aloofin a world of trading blocs, they stand tolose tremendously. In a world that isheaded towards free trade, regionalagreements would facilitate the entry ofsmaller nations in the multilateral tradingsystem on a preferential basis. It isimportant for South Asian countries toacknowledge the welfare gains from theirown regional arrangement which wouldat the same time prepare the domesticproducers for the rigours ofmultilateralism.

Clearly it has been the political tensionin the region that has been the mainstumbling block to trade andcooperation—the history and current tradeand cooperation in South Asia is testamentto the long-standing mistrust that hasdominated the post-war era (see box 5.4).

There can besignificant gainsboth from increasingintra-regional tradeas well as fromtrade outside theregion


There is no question that a regionalarrangement that addresses economicissues while removing political hostility isbeneficial to all. There is also a need toshield the poor masses of the region fromthe rigours of globalisation.

Policy implications

In view of the lack of mutual trust, ethnicand religious conflicts, and the magnitudeof bilateral disputes in South Asia, it isunrealistic to believe that any substantialgrowth of regional cooperation is possiblewithout first easing political tensions. Anyrealistic assessment of the prospects forthe growth of economic cooperation andinterdependence in South Asia has toaddress several of the following issues.

The first issue relates to the role of thestate in promoting regional cooperation

in South Asia. Given limited politicalcontacts and mutual security concerns, astate-directed approach to economiccooperation is better suited to this region.Any prospect of enhancing regionaleconomic cooperation exclusively by themarket forces appears bleak. Consciousefforts at the political level anddemonstration of political will by theSouth Asian leaders are absolutelynecessary for the growth of regionaleconomic cooperation in South Asia.

The second issue concerns thedevelopment of a pragmatic approach toeconomic cooperation in South Asia.Given the extensive heterogeneity in thelevels of economic development of SouthAsian countries, how can they proceed toachieve such a strategy? Clearly, theapproach should be gradual and based onthe economic capability of each state.

The various economic groupings joinedby the South Asian countries have notmet with great success. South Asia,during the last fifteen years, haswitnessed four major attempts atregionalism, via various trading blocssuch as Economic CooperationOrganisation (ECO), Indian Ocean RimAssociation for Regional Cooperation(IOR-ARC), Bangladesh, India,Myanmar, Sri Lanka, and ThailandEconomic Cooperation (BIMSTEC)and SAARC.

ECO, at present consists of Islamicnations of Central Asia, Islamic nationsof Eastern European countries(Turkey), West Asia (Iran), and SouthAsia (Pakistan). Intra- ECO tradeduring the first five years of the 1990sstagnated between 2-5 per cent of itstotal trade. The member states of ECOsigned a Preferential Trade Agreementin 1992 that provided for a 10 per centimport tariff reduction on specifiedcommodities. It was further proposedthat expansion of the list of concessionsand increase in the depth of tariffreductions to 25 per cent will take placebut no action was taken. This lack of

Box 5.4 Regional trading blocs and South Asia

commitment has therefore nottranslated into any significant increasein intra-ECO trade.

The IOR-ARC was formed in themid-1990s when India’s ‘Look East’policy coincided with Australia’s ‘LookWest’ policy at the time when SouthAfrica was attempting to assert itsregional space and gain recognition inglobal affairs. In 1999, there were 19member countries that formed IOR-ARC including India, Sri Lanka andBangladesh from South Asia. India hasblocked Pakistan’s entry to the IOR-ARC, as Pakistan is not offering MFNstatus to Indian exports.

Cooperation among the IndianOcean countries has also not been agreat success. The countries are vastlydifferent and they have their politicalallegiances with non-IOR-ARCcountries. Above all, economic co-operation in the IOR-ARC is based onthe ‘open regionalism’ arrangement,which is a very vague concept. Theprospects for South Asian countries toestablish stronger links with Australia,Africa, and the Gulf via IOR-ARC donot seem to be bright.

South Asia’s attempt to form acorridor to ASEAN and Japan, viaBIMSTEC was a Thai initiativestemming from Thai government’s‘Look West’ policy in late 1997.BIMSTEC is viewed by some as therevival of the old Bangkok Agreement,which is reaching a point of naturaldisintegration. Given the commitmentsfor preferential trade agreements inASEAN and SAARC, reductions intariff among BIMSTEC members couldtake place only in the wider Asiancontext under the Bangkok Agreement.Any other new initiative in preferentialtariff among BIMSTEC countries maynot be possible at this point in view ofthe national commitments to WTO andalso due to the existing preferentialtrading arrangements.

The fact that SAARC membercountries are looking at forming otherregional alliances in the presence ofSAARC reinforces their frustrationabout SAARC. As is suggested by thefailure of these attempts at formingregional alliances, South Asia has toconcentrate more on SAARC and adoptan attitude of rational economicbehaviour and understanding.


Regional cooperation should not replace,but only complement the existing bilateraltrade and economic transaction betweenthe South Asian countries. The growinginterest in operationalising a South AsianFree Trade Area (SAFTA) should notobscure the importance of the extra-regional and global economic cooperationthat most of the South Asian countriesare currently engaged in. For instance, itwould be detrimental to the economicinterests of India, Pakistan and Sri Lanka,if they do not seek access to the marketsin Central Asia, Southeast Asia, the Gulfregion, and the OECD countries. The keyto the development of a pragmaticstrategy to increase economic cooperationamong the countries is to promote intra-regional trade by lowering tariffs withoutde-linking from inter-regional and globaleconomic relations.

Third, to begin with SAARC countriesshould pursue modest trade objectivesand seek joint development projects ofmodest scale. Only after the benefits fromthe modest cooperation have beenreaped, and are visible, that the tempo ofcooperation be increased.

Fourth, conservation of the naturalresource base should constitute anintegral part of any economicdevelopment strategy. In order to meettheir growing needs of energy andalleviate health risks, South Asiancountries should give top priority to anefficient use of the natural resource baseand conserving the environment.

Finally, a South Asian DevelopmentFund (SADF), as suggested by the Groupof Eminent Persons (GEP) should beestablished in order to provide financialsupport to regional projects (GEP Report1998). The aim of the proposed fund isto undertake regional infrastructure,environmental, poverty alleviation, andhuman resource development pro-grammes; assist in financing jointventures; and to extend support for intra-regional and inter-regional trade. Asuccessful SADF will be able to providethe much-needed economic support toregional projects and thereby strengtheninterdependence among the South Asiancountries.

What South Asia needs is regionalidentity and rationality. No one countrycan unilaterally level the ground formaking SAARC an efficient organisation.A consensus needs to be developed andagreed to by all SAARC membercountries about the place of South Asiawithin Asia and also internationally.

South Asia can learn a few lessons fromASEAN. The success of ASEAN has beenattributed to three factors: Each countrymust build up its own resilience and othercountries must help that country to thisend; the low-key approach of its biggestmember, Indonesia; and the habit ofworking together. Seen in this context,India has a clear responsibility to bemagnanimous to other members ofSAARC, and other smaller countries in theregion should also modify their attitudesto make SAARC an efficient body.

What South Asianeeds is regionalidentity andrationality


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Institutions of Global Governance and Globalisation 119

6Institutions of Global

Governance and Globalisation

Global markets cannot achievejustice for all nations or all people.Global institutions are needed to setrules, to monitor ‘global goods’ and‘global bads’, to redress wideningdisparities. Paradoxically, the globalinstitutions are weakening just asglobal interdependence isincreasing.

– Mahbub ul Haq


In the wake of globalisation, growingeconomic interdependence of countriesposes enormous challenges for globalgovernance. A global economy hasemerged but the institutions of globalgovernance, i.e., the governmentalfunctions that need to be performed atthe global level, are not performing eitherefficiently or equitably. While the worldeconomy has been evolving towards anintegrated system, the mechanisms formanaging the system in a stable andsustainable way for the benefit of allpeople have lagged behind. Theglobalisation process is expanding globalopportunities without distributing themequitably. There are enormous differencesin the relative power and influence ofdifferent actors at the global level: thereare nations of different size and power,international institutions of differentdegrees of influence, private firms ofdifferent size and power, andinternational NGOs of different degreesof influence.

Among the most powerful of themultilateral economic institutions are theBretton Woods Institutions (BWI), i.e.,the International Monetary Fund (IMF)and the World Bank, and the WorldTrade Organization (WTO), in which therepresentation of the majority of world’spopulation is particularly weak. Decision-making in these global forums, asperceived by many analysts, is neitherrepresentative nor transparent. As such,much of the criticism of globalisation hasbeen directed at these institutions forfailing to address the inequities andadverse effects borne by the poor nationsand poor people. The previous chaptershave analysed the national policies andtheir impact on people in South Asia. Inthis chapter we look at these threeinstitutions of global governance that

have been most responsible for framingthe policies of globalisation in order tointegrate the developing world into theglobal market.

Bretton Woods Institutions: A briefhistory

The Bretton Woods Institutions werecreated to serve as global institutions formaintaining financial stability and forpromoting development and trade. Whilethe intentions of the founding fatherswere noble, these institutions arecurrently experiencing a crisis ofconfidence as there is a growingperception that they have failed to achievethe objectives for which they werecreated.

After the Great Depression of 1930sand the Second World War, the famousBritish economist, John Maynard Keynes,became convinced of the imperative ofsetting up institutions of internationaleconomic management that wouldprotect the world from another economiccatastrophe. Keynes’ ideas, embodied inthe 1942 Memorandum, were based onfour pillars. The first pillar was to provideglobal macroeconomic monetary andfinancial stability. The original idea wasof a World Central Bank which wouldmaintain full employment and provide theliquidity for this purpose by expandingthe supply of ‘bancors’, the proposedworld reserve currency. This wouldmainly serve to finance the balance ofpayments deficits of countries. In 1942,Keynes wrote, ‘We need a systempossessed of an internal stabilisingmechanism, by which pressure isexercised on any country whose balanceof payments with the rest of the world isdeparting from equilibrium in eitherdirection (italics by Keynes), so as to

Chapter 6

Institutions of Global Governance andGlobalisation

While the worldeconomy has beenevolving towards anintegrated system,the mechanisms formanaging the systemin a stable andsustainable way forthe benefit of allpeople have laggedbehind


prevent movements which must createfor its neighbours an equal but oppositewant of balance’. The second pillar waswhat ultimately emerged as the WorldBank, or International Bank forReconstruction and Development. In the1942 Memorandum, this was suggestedto be an investment fund for relief anddevelopment of war-torn Europe. Thethird pillar was the International TradeOrganisation whose primary function wasto stabilise prices of primarycommodities. The main idea was toprevent the collapse of prices of primarycommodities which had been a markedfeature of the Great Depression. Thefourth pillar of the system was meant tobe a soft aid programme linked with theUnited Nations (Singer 1995).

The Keynesian vision for the BrettonWoods Institutions was greatly diluted inactual implementation (M. Haq 1995).• In the place of a World Central Bankwith access to resources equal to one-half of world imports, as was proposedby Keynes, the IMF was established withcontrol over less than 3 per cent of worldimports. The reserve currency of IMF(Special Drawing Rights) constitutes onlyabout 3 per cent of global liquidity. Andwith the introduction of floating exchangerates in 1971, the main function of IMF,i.e., maintaining exchange rate stability,was also lost. So the IMF reinvented itselfby undertaking surveillance, providingtechnical assistance and short-termresources to tide over balance ofpayments difficulties of developingcountries. Keynes placed the burden ofadjustment on both surplus and deficitcountries; in actual practice, deficitnations, mainly developing countries, bearthe burden of adjustment.• Similarly the World Bank, which wassupposed to stand between the globalcapital markets and the developingcountries and to recycle surplus resourcesto poor nations for promotingdevelopment, is now a minor player inglobal capital markets. The dominant rolein recycling funds is now played by

multinational corporations (MNCs) withhome base, in most cases, in developedcountries, and investing in a handful ofdeveloping and former communist bloccountries, with the aim of making profitand expanding their market share. In1999, of the total net financial flows(FDI) in the world, World Bankaccounted for only one per cent and IMFprovided minus 1.4 per cent (see figure6.1a), whereas in South Asia, World Bankaccounted for 31 per cent and IMF forminus 2.7 per cent of the net financialflows to that region (see figure 6.1b). It isa sad commentary on the currentinstitutions of global governance thatdespite being such minor providers ofresources for development, they exerciseso much influence on the economicpolicies of developing countries!• Keynes envisioned an international tradeorganisation which would not onlymaintain free trade but also help stabiliseworld commodity prices. But as there wasno consensus for creating a world tradingbody, a General Agreement on Tariffsand Trade (GATT) was set up whichexcluded primary commodities altogetherfrom its purview. Finally in 1995, at thelast round of Uruguay trade negotiations,the World Trade Organization (WTO)was established. This new institutionprovides for a dispute settlementmechanism to ensure a rule-based tradingsystem. It also deals with the commoditiestrade.

The impact of policy conditionalitiesof these global institutions of governancehas fallen disproportionately on the poor,both socially and economically.Organisations such as the UN andinternational NGOs have tried to respondby playing a supportive and partnership-oriented role in addressing the concernsof the poor. Nevertheless, the fact thatglobal private corporations, driven mainlyby the profit motive and mostlyunconcerned about social issues, controla large proportion of global GDP is amatter of serious concern to many poorpeople and poor nations (see figure 6.2).

Source: World Development Indicators2001.

Figure 6.1a Net financialflows from multilateralinstitutions as a % of FDIflows 1999 (world)

WB flows% of FDI

IMF flows% of FDI

1.5

1

0.5

0

-0.5

-1

-1.5

-2

Source: World Development Indicators2001.

Figure 6.1b Net financialflows from multilateralinstitutions as a % of FDIflows to South Asia (1999)

WB flows% of FDI

IMF flows% of FDI

50

40

30

20

10

0

-10

Source: Epstein 1999.

Figure 6.2 Top 200 globalcorporations

30

25

20

15

10

5

01982 1992 2002*

* Forecast


Recent policies of IMF and WorldBank in South Asia

While the early policies of the globalinstitutions of governance were designedin the spirit of building the capacity ofthe state, over time there has been a trendtowards reducing the role of the state andmoving towards liberalisation andprivatisation in South Asia as well as inother developing countries. The reasonfor this shift is partly due to inefficienteconomic management in the publicsector in most countries of South Asia.

In our 1999 report on HumanDevelopment in South Asia, we underscoredthe governance failure as one of the mostcritical challenges that South Asia facestoday in promoting economic growth andreducing poverty. The South Asian stateshave fallen back on their essential tasks,even though their involvement in thesocio-economic lives of the people ispervasive. They are unable to deliver themost basic public goods—soundmacroeconomic management, basic socialservices, and internal law and order. As aresult of these failures, during the 1980sand 1990s debt burden kept on rising,trade and budgetary deficits widened, andpoverty increased. This was the situationwhich led the South Asian governmentsto seek IMF and World Bank help. Short-term relief was sought from the IMF totide over the short-term financial crisis;the Bank was approached to providemedium to long-term developmentfinance to revive economic growth andreduce poverty.

Most South Asian countries have beenimplementing the IMF and World Bankstabilisation and structural adjustmentprogrammes during the 1990s. While theIMF loans are useful as a certificate ofcreditworthiness for accessing othermultilateral and bilateral loans, grants andinvestment, the conditionalities attachedto these loans make it impossible forcountries to get out of the debt trap andon to a higher growth path. Experienceof South Asian economies has shown thatduring the period of structural

adjustment, poverty has increased andincome distribution has deteriorated. Inearly 1990s, unsustainable balance ofpayments and fiscal deficits, among othervariables, compelled India and Pakistanto take loans from the IMF and theWorld Bank which carried the usualconditions for stabilisation and structuraladjustment, including cuts in publicexpenditure. As shown in chapters 3 and4, while India’s growth rate had increasedto over 6 per cent, income inequality hadincreased, poverty had been reduced atthe national level and in urban areaswhereas in the rural areas it had gone up.In Pakistan, on the other hand, growthrate had declined and both poverty andinequality had increased.

Impacts of stabilisation and structural adjustment

The most debated IMF/World Bankinstruments have been the stabilisationand structural adjustment programmes(SAPs) which countries must implementin order to have access to funds forachieving higher growth with stability.These programmes include wide-rangingreforms and restructuring in many areas,including contraction of demand throughfiscal and monetary policies, andimproving productivity and competi-tiveness through privatisation andliberalisation of markets. While suchfunds are intended to provide relief fromboth short-term balance of paymentsdeficits as well as long-term funds fordevelopment purpose, fiscal balance hasgenerally been achieved at the cost ofsocial services including cuts inexpenditure for education, health andfood subsidies targetted mainly at thevulnerable groups in the society. Whilepolicy decisions to allocate funds to socialsectors is a responsibility of nationalgovernments, the policymakers in SouthAsia, however, are finding it increasinglydifficult to allocate more resources forsocial programmes. The servicing liabilityof past debts is perhaps the single mostserious constraint in this regard. In orderto make an assessment of the usefulness

Experience of SouthAsian economies hasshown that duringthe period ofstructuraladjustment, povertyhas increased andincome distributionhas deteriorated


of IMF/World Bank programmes inSouth Asia, we need to briefly look atfive critical areas of concern.

DEBT BURDEN: Although South Asiahas been the second largest (Africa is thelargest) regional recipient of concessionallending from the Bank’s soft-loan affiliate,IDA (see figure 6.3), yet the region hasaccumulated a huge level of debt. Inaddition to mounting militaryexpenditure, debt servicing is a majorconstraint to increased developmentinvestment in South Asia. Unsustainableand high debt servicing levels consumesignificant portions of some countries’GDP. In terms of total debt, of the top15 debtor countries, India is ranked as8th, with a total external debt of94 billion, with Pakistan at 34 billion,Bangladesh at 18 billion, Nepal at3 billion and Sri Lanka at 9 billion USdollars (WB, WDI 2001). The debtburden is particularly heavy in the case ofthe least developed countries in SouthAsia which are Maldives, Nepal, Bhutanand Bangladesh. While debt is beingrescheduled and/or written-off in manynations of sub-Saharan Africa, throughnew initiatives and donor commitments,the least developed nations in South Asiahave so far not been able to get muchrelief from these initiatives.

POVERTY: Both IMF and World Bankare now committed to poverty reductionin developing countries. Although IMFstrictly adheres to its macroeconomicstabilisation policies, in 1987 it createdthe Enhanced Structural AdjustmentFacility (ESAF) in order to make IMFfinancing less expensive for the low-income countries. However, in view ofthe harsh criticisms emanating both fromprofessional analysts as well as from thecivil society groups concerning theadverse impact of IMF policies onpoverty, in 1999 IMF announced itscommitment to poverty reduction andreplaced ESAF with Poverty Reductionand Growth Facility (PRGF). Developingcountries are now required to prepare

Poverty Reduction Strategy Papers(PRSPs) to access this facility.

Studies commissioned by the WorldBank have also shown that the Bank’spoverty assessments failed to address thelink between poverty reduction andmacroeconomic and sectoral policies. TheBank’s poverty assessments also gavelimited attention to local dimensions ofpoverty reduction and to the role of debtin poverty creation. Thus, the Bank hasalso joined IMF with a sharper focus onpoverty reduction as an essential elementof the strategy for accelerating economicgrowth. PRSPs have become an importantpolicy document of governments in theirnegotiations with the IMF and WorldBank. Without an acceptable PRSP, acountry can have little access to externalassistance since the funding by otherdonors also depends on the acceptance ofPRSP by the IMF and the World Bank.But a typical PRSP includes all thestabilisation and structural adjustmentpolicies that are considered essential byIMF/World Bank to facilitate the country’sentry into the global markets for goods,finance and services (see box 6.1).

PRIVATISATION : While the WorldBank policies were initially intended toassist developing-country governments intheir development initiatives, the policiesduring the late 1980s have seen the

Figure 6.3 Cumulative inflows of IDA in South Asia

120

100

80

60

40

20

0India Bangladesh Pakistan South Asia

Source: World Bank, World Development Indicators 2001.

(U.S. $ billions, 1999)


activities of the Bank shifting towardsempowering the market and privatesector. Furthermore, rather than use suchdevelopment efforts to build up thestrength of local firms, the lion’s share ofdevelopment contracts have gone toforeign firms.

In order to facilitate the region’sintegration into the global economy, theBank has encouraged private sectorparticipation in the funding andmanagement of infrastructure projectssuch as power, telecommunications,natural gas, and transport. Urbandevelopment projects that strengthenurban planning, finance and improvetransport infrastructure, and improveservice delivery in areas other than theones just noted, have also involved theprivate sector. Lately, there have beenincreased efforts to privatise oil and gasdevelopment, distribution of power,telecommunications, infrastructuredevelopment, as well as institutional andregulatory reform as reported in Pakistan,India, Bangladesh, Sri Lanka and Nepal.

A serious problem arises from suchrapid privatisation. In many South Asian

countries there is a weak domestic baseof investors, so with increasing foreigninvestment in public assets, ownershipand control is transferred to outsiders.This can have adverse socialconsequences if the asset in question, forexample, a well-networked bank withmany linkages to rural areas and providingsmall credit, falls into foreign hands andundergoes a strategic restructuring withrespect to its mandate and its functioning.It is quite probable that this type ofrestructuring may go against its originalpurpose of serving the poor people indistant areas.

Privatisation has yielded mixed resultsas regards actual improvements inefficiency. Furthermore, many SouthAsian firms are not globally competitive.In order to improve competitiveness, theWorld Bank and IMF often recommendclosing down and/or privatising manysuch firms, resulting in layoffs andincreased unemployment.

Increased privatisation is forcinghundreds of small and medium-sizedenterprises, for example, textile mills,battery manufacturers, ceramic units,small machinery and makers of spareparts that employ mainly the poor, to shutdown due to foreign competition.Closures due to privatisation in India havepushed a large number of workingwomen (11 per cent of the public sectorlabour force) to work under dismalconditions in the informal sector.

LIBERALISATION : Liberalisationpolicies are supposed to create a globalmarket environment where resources canbe allocated free from the inefficienciesand distorting policies of stateinterventions. But in the real world ofSouth Asia where management andlabour skills are limited, finance is notreadily available, infrastructure is poorand rules of business are not properlydeveloped or enforced, the policies fortrade, financial and investmentliberalisations that have been designed toencourage the best allocation of resourcesdo not really result in increasing

Box 6.1 Are the new Poverty Reduction Papers really new?

The Poverty Reduction Strategy Papers(PRSPs) have drawn criticism for beinglittle more than reworked versions ofstandard IMF policy papers thatmandate structural adjustmentprogrammes as preconditions toaccessing IMF assistance. A policydilemma results from the PRSPs inmany cases as the implied methods ofimplementation directly conflict withelements of Structural AdjustmentProgrammes. For example, how willsubsidies, social safety nets and socialsector spending be protected from cutsprescribed by SAPs? There is a need tobalance social sector needs with thoseof economic revival. A satisfactorysolution to this dilemma holds the keyto the high pro-poor growth.

In the Poverty Reduction GrowthFacility framework, the ‘success’ of apoverty reduction strategy is based ongovernment’s macroeconomic and

structural reform policies. While aPRSP might even yield some usefulinformation about how povertyshould be addressed, it is vague asto how poverty elimination measureswill be linked to the standard arrayof macroeconomic and structuraladjustment conditionalities thatcontinue to remain the mainstay ofthe IMF-World Bank reformprogrammes. Evidence from theinterim PRSPs already undertaken inAfrica, Latin America, South Asiaand Southeast Asia shows strikingsimilarities with the conditionalitiesthat accompanied earlier PolicyFramework Papers. There has beenno transformation nor examinationof historic causes of poverty whileachievement of social goals isrelegated to social safety nets,regardless of government capacity toprovide them.


investment and accelerated growth.Volatile private capital flows and highlyprotectionist export markets havethreatened the fragile economies. Thestabilising state regulatory controlmeasures are being undermined byinternational agreements. In recent yearsthe developing countries have run greatercurrent account deficits as a proportionof GDP than in the past, withoutachieving higher growth rates. Thesegrowing current account deficits havebeen primarily due to widening tradedeficits, as export earnings have generallybeen unable to keep pace with the rapidimport expansion. Evidence from manycountries shows that trade liberalisationis followed by a combination of largecapital inflows, currency appreciation andmounting trade deficits mainly due toimport surges being unmatched bysluggish export responses. The chain ofevents often ends with a crisis involvinga reversal of capital inflows, collapse andovershooting of exchange rates, sharpcuts in imports and a strong economiccontraction (UNCTAD 1999b).

The liberalisation policies have alsopromoted the corporatisation of largeagricultural farms and has indirectlypromoted the entry of large agro-MNCs.The World Bank funding to Indianagriculture has supported the fertiliserindustry, groundwater pumping, high-yield seeds and setting up of bankinginstitutions to finance capital-intensiveagriculture. However, there has been littleexamination of how such liberalisationpolicies will affect the sustainablelivelihoods of subsistence farmers whomake up the majority of the agrariansector. It is feared that the structuraladjustment programmes comprisingsubsidy elimination, establishment ofagro-corporations, removal of traderestrictions on agricultural commodities,and an overall unification of local withglobal prices will leave the poor farmersin a most vulnerable situation.

While state inefficiency and artificiallow pricing of agricultural commoditieshave led to decreased agricultural

productivity and rural income, there hasbeen little discussion on how improvedgovernance could ensure the provision ofbetter infrastructure, tenancy rights,reform of land ownership and protectionfor small farmers. The policy initiativesin these areas have been few in SouthAsia.

EMPLOYMENT : On this front theconcerns that stem from globalisationpolicies are both positive and negative.Liberalisation involves opening up ofmarkets to foreign competition andinvestment while reducing governmentintervention and protection. Marketliberalisation policies are lowering barriersto opportunity for the educated andskilled labour force of South Asia leadingto increased employment, investment andgrowth of the information technology andtelecommunications sector. IT-enabledsectors, such as data-processing andteleworking, have not only created directemployment for thousands of men andwomen mostly in India, but in otherSouth Asian countries as well (250,000jobs for women over past four years asquoted in ILO World EmploymentReport 2001). On the other hand, barriersto opportunity exist for a broad segmentof South Asians who are uneducated andunskilled and thus cannot benefit fromthe new technology-created jobs.Furthermore, unemployment is rising asa result of massive layoffs by theprivatised state financial institutions andutility companies. Most importantly, themarginalised people who rely on the statefor employment and social support(education and healthcare) to remainabove the poverty line are the ones mostexposed. These groups find it mostdifficult to adjust.

IMF in Latin America, East Asia andRussia

In the 1980s, the Latin Americancountries had experienced huge financialand fiscal crises because of hugegovernment deficits, loose monetary

There has beenlittle examination ofhow suchliberalisationpolicies will affectthe sustainablelivelihoods ofsubsistence farmers


management and runaway inflation. Thesituation called for tight fiscal andmonetary policies to stabilise theeconomies. The policies that the IMF hadprescribed to governments in LatinAmerica covered wider concerns thanmerely achieving fiscal and monetarybalance. It included achievement ofmacroeconomic stability through controlof fiscal deficits, opening up the economyto foreign competition, and reducing therole of the state through privatisation andderegulation. In the case of LatinAmerica, the IMF/World Bank medicineworked. The region’s economic healthwas restored (Burki 2001).

But when the IMF was called in tohelp with the East Asian crisis, it did notlook at the different underlying factorsthat had caused the crisis in East Asia.Unlike Latin America, the East Asiancountries were running budget surpluses,had kept money supply under control,and the inflation rate was low. Thegenesis of the problem was created in the1990s by international pressure, includingthat of the IMF, on the governments ofEast Asia to open up their financial andcapital markets. With savings rates ofaround 30 per cent these countries didnot need to attract additional funds. Thederegulated financial and capital marketshad led to inflows of short-term hotmoney that comes in as quickly as it goesout, in search of instant profit. Theseflows of hot money in East Asia had ledto real estate boom. Its outflow wasinstrumental in real estate bust. Insteadof focusing on the recklessness of theprivate sector, the Fund had used theLatin American recipe of tight monetaryand fiscal policies to control the publicsector. The inappropriate policies hadaggravated the crisis in East Asia and wasinstrumental in spreading the contagionfar and wide, including Russia.

As Russia did not have a sufficiently-developed institutional infrastructure toallow a free market economy anduncontrolled capital flows to work well,the rapid liberalisation and privatisationimposed upon Russia by the IMF, at the

insistence of the US, had allowed a smallgroup of oligarchs to gain control of stateassets and plunder the country. Thus whenthe East Asian contagion spread, thecorrupt money flew out of the country,leaving a devastated economy behind. TheGDP was cut by half, poverty rates roseto almost 50 per cent, with more than halfof Russia’s children living below thepoverty line (Stiglitz 2000).

Many developing countries have beencritical of the IMF restructuring policiesthat have exacerbated the divide betweenthe rich and the poor. Many claim thatthe IMF had aggravated the Asian Flu bycompounding capital flight with harshconditionalities that had made thingsworse. IMF’s shock therapy—currencydevaluation and increased interest rates—squeezed the domestic economy andtransformed the financial crisis in eachcountry into an economic and socialcrisis.

IMF in South Asia

The underlying economic situation—pooreconomic management, large fiscal andcurrent account deficits, and low tax toGDP and saving to GDP ratios—wasalmost the same in each South Asiancountry. When these countriesapproached the IMF for assistance, theIMF prescribed the same Latin Americanmedicine of tight monetary policy anddemand contraction, complemented byprivatisation, liberalisation of trade andreduced role of governments in theeconomy. The IMF did not take accountof the fact that these countries were at avery different stage of economicdevelopment with lower humandevelopment indicators, higher povertylevels and lower levels of infrastructuredevelopment than those prevailing inLatin America. However, it is importantto note that while India had managed toachieve the results as required under theIMF programme, its prescription in othercountries was not very satisfactory.

India’s stabilisation and structuralreform programmes implemented in the

Many developingcountries have beencritical of the IMFrestructuringpolicies that haveexacerbated thedivide between therich and the poor


1990s, had all the usual attached termsand conditionalities. However, the Indiangovernment formulated its own strategieswith targeted objectives and deadlines toachieve the required results. As a resultof the government’s self-imposeddiscipline, the stabilisation measuressucceeded in bringing the deficit to a saferlevel and giving a greater role to monetarypolicy. Foreign exchange reserves wentup considerably, and the IMF loan waspaid back within a few years. The engineof Indian economy’s remarkableturnaround was the IT sector. Thefacilitating role played by the structuralreform programmes needs to behighlighted in this context.

On the other hand, although Pakistanhad started the IMF programme beforeIndia, its economic situation starteddeteriorating further so that Pakistan, tillrecently, was not able to complete anyof the IMF programmes. During the1990s, the period of stabilisation andstructural adjustment, growth rates fell,debt burden rose sharply, and povertyintensified. The reforms undertakenunder IMF/World Bank policies anddirection have not so far delivered thepromised results. The standardstabilisation programmes have focusedprimarily on stabilising the economy andnot on reviving growth. The timing aswell as the design of the programme wasinappropriate as it was introduced whenthe economy was decelerating, publicconfidence sagging and incomeinequality between the rich and the poorwidening. The recessionary componentin the IMF programme had made thebad situation worse.

Sri Lanka, another country under theIMF standby arrangement, has alsoexperienced low growth, an import surge,export stagnation and capital flight.Admittedly, many of the causes of theweak economic situation are due to theongoing civil strife. But if the IMFassistance comes with the conditionalitiesthat worsen the situation further, wherecould the countries go for help in timesof economic crisis?

World Trade Organization

WTO is the newly-established globalinstitution that provides a solidfoundation of the new multilateral rule-based trading system. The scope of itsactivities includes trade in goods includingagricultural commodities, services andintellectual property. A dispute resolutionmechanism has also been establishedunder WTO to provide power to theorganisation to keep the signatory stateswithin the boundaries of the tradingsystem they have established themselves.

The predecessor of WTO, the GeneralAgreement on Tariffs and Trade (GATT),did not acknowledge the importance ofprimary commodities to Southerncountries. So the inclusion of primarycommodities in trade negotiations hasbeen of great importance to developingcountries. However, as we will discussbelow, agricultural trade is still beingprotected in developed countries,contrary to WTO aims and objectives offree trade. The WTO, on the other hand,has been accused of overloadingagreements with a built-in agenda andterms that are too harsh for developingeconomies to adhere and adjust to. Whilethe WTO mandates a ‘one country onevote’ policy, it is argued that its agenda isshaped, paced and driven by the US, EUand other developed countries basedlargely on negotiating capabilities andeconomic strength.

The pace of negotiations at the WTOhas been set by the resource-richNorthern countries, leaving the rest tostruggle with the outcomes of secretivemeetings and swift agreements. Since theUruguay Round, developed countrieshave failed to implement agreed-uponcommitments and tariff reductions underthe regular and Special and DifferentialTreatment (SDT) clauses. As tariffbarriers have fallen in developingcountries, the world has been furtherdivided along income lines, separating theglobal rich from the global poor. It isargued that political pressures in theNorth have resulted in developing

Agricultural trade isstill being protectedin developedcountries, contraryto WTO aims andobjectives of freetrade


countries reducing their tariffs to levelslower than what is required by the WTOagreement.

Trade in goods

Most of South Asia’s manufacturingindustries, long protected by subsidiesand import substitution policies, are notcompetitive to face the challenges of theglobal market. Prior to moving towardscomplete liberalisation, South Asia needsfirst to introduce competition-inducingpolicies in all sectors to improve theirsectoral efficiency and productivity. Thisrequires closer cooperation between thegovernment and the private sector. Themain improvements in exports for SouthAsia have been in the traditional sectorswith low wages. India’s software industryalso depends on its relatively cheap skilledlabour. The need for exportdiversification has been acknowledged formany decades, but success has been slowin coming. And now the traditionalexport sectors are also facing the newrules of the game (see box 6.2).

So far, market liberalisation has beenone sided. While developing economieshave been forced to drastically reducetheir tariff rates, their Northerncounterparts have not delivered the

promised tariff reductions on goods ofkey interest to poor countries. Withrespect to the dispute resolution process,the majority of cases filed in the disputesettlement arena of the WTO have beenby the developed countries.

Trade in services

The importance of services in the exportsof developing countries has been growingrapidly in the recent past. Exports ofservices is currently more than 20 per centof the total exports of developingcountries (Martin & Winters 1995). Inview of the rapid expansion of trade inglobal services, the General Agreementon Trade in Services (GATS) hasimportant implications for thedevelopment prospects of South Asia.When services were first included in theUruguay Round in the mid-1980s, therewas a general resistance to it indeveloping countries. However, theprovisions of GATS do not provide foran across the board liberalisation of theservices sector. Each country is free todecide the extent of its own market accessto other countries for services of interestto it. Under the Agreement, thedeveloped countries have offered marketaccess commitments to only 50 per centof their services market. In fact, theGATS involves no commitment to reducethe levels of protection. It involves onlya standstill commitment that theprotection of the services sector will notbe increased.

In view of the large potential gains froma comprehensive liberalisation of servicesof all kinds (travel, transport, labour andfinancial services, etc.) to the developingcountries, it is crucial that futurenegotiations in the services sector openthe services market in developed countriesfor the benefit of developing countries.The surplus low and unskilled labour inSouth Asia—the vast majority of SouthAsian population—has virtually no accessto opportunities in the North. Theprotectionist nature of Northern policiesis perhaps most evident in this case.

Box 6.2 Clothing and Textiles

As per the Uruguay Round, Southernnations have reduced tariffs only tofind an aggregate reduction mechanismemployed by the North, which enablesthem to selectively keep tariffs highon items of interest to the South. Thehigh tariffs on such items are beingfelt by South Asia’s clothing andtextiles sector, due to which exportsto the US have not risen. If South Asiaimproves its competitive efficiency, theMulti Fibre Arrangement abolitionmay bring benefits in terms ofincreased exports but will also leavethe once protected quotas exposed tofree market competition. Value-addedgoods need to be a part of the strategyto benefit export interests, forexample, the products of raw cotton,

textiles, raw leather, leather goodsand agricultural products (cotton,wheat and rice). The backwardlinkages between this sector and thepoor elevate its socio-economicimportance to South Asianpolicymakers interested in povertyeradication. Tariff escalation, atraditional tactic of the North alsoneeds to be dismantled so thatprocessed products may be exportedfrom the South with greater ease andmay encourage the demand forskilled labour. For example, EU andUS tariff behaviour places a lowertariff on raw leather than it does onleather goods. This practice does notencourage export of South Asia’svalue-added products.

Source: MHHDC staff.


Intellectual property rights

Developed countries have longrecognised the evolution of the globalmarketplace from a capital to aknowledge-based system. This foresightforged the Intellectual Property Rights(IPRs) Agreement long before theestablishment of WTO. The institutionthat manages the IPRs is the WorldIntellectual Property Organization.Developed-country research anddevelopment investments have driven theprotective movement as over 90 per centof the patents owned globally are in thehands of the EU or US innovators, while90 per cent of biological resources andlife forms are indigenous to developingnations. While the mechanisms, policiesand legal frameworks are lacking inSouthern nations, the Northern onescontinue to file for licenses and patents.

While the WTO’s dispute settlementprocess and TRIPS agreements heavilyfavour the negotiating expertise of theNorth, there are signs of success in SouthAsia, where MNC applications for patentsfor cases such as Basmati rice (in conflictwith the Convention on bio diversity), arebeing withdrawn due to public pressurefrom both North and South.

Article XXVII:III(b) of TRIPS atpresent calls for patents or sui generis rightson plant varieties developed by the‘breeder’. This interpretation underminesthe rights of South Asia’s indigenousfarmers who may be forced to pay fortraditionally natural inputs through fees toagro industry, global patent owners ofplant life in essence ‘owning all of the byproducts’ of harvest. The effects of such aTRIPS-oriented patent system would resultin the monopolisation of indigenousknowledge (medical, agricultural) by MNCsleading to higher prices of medicines andseeds/fertilisers at the expense of poorfarmers and consumers.

Outside of agriculture, TRIPS willreduce the availability of copied or piratedproducts, particularly software, that hasfertilised the growth of the IT-enabledservice sector in South Asia. Increased

costs will reduce access to skills andtherefore further erode the position ofthe South Asian labourer. This is not tosay that protection of intellectual propertyrights is a one-sided affair. Indeed, it is ineveryone’s interest to provide theinventor with some protection for theinvestment of resources in research anddevelopment. In the case of India, forexample, lack of protection of intellectualproperty rights in the 1980s is blamed forlow investment and lack of modernisationof the chemical and pharmaceuticalsectors. However, a balance must beachieved that protects indigenousknowledge and makes provisions for less-developed economies that are clearly at adisadvantage.

The growing concern in the case ofthe health sector is of course, that theWTO offers opportunities as well asthreats. The fear stemming from theinability of the poor in developingcountries to afford essential drugs orvaccines for newly-emerging diseases suchas AIDS is a looming threat. Already, thesharp increase in the price of drugs fordiabetes is creating concern. Import/export and industrial policies toencourage the manufacture of medicalequipment again influence the ability ofthe system becoming more equitable andefficient.

Trade in agricultural commodities

The most fundamental problem inagricultural trade lies with the domesticpolicies of developed countries.Agriculture in most developed countriesis sheltered behind high tariff walls, farmsubsidies, loan guarantees and non-tariffbarriers that place those developingcountries that are heavily dependent onagricultural exports at a greatdisadvantage. Agricultural trade is notbeing liberalised as fast as trade inmanufactured goods. In developedcountries, tariffs on agricultural productshave remained at 40-50 per cent range;Japan had a tariff of 1000 per cent onrice last year (2000).

The inability of thepoor in developingcountries to affordessential drugs orvaccines for newly-emerging diseasessuch as AIDS is alooming threat


This is one of the most importantreasons for developing countries’ lack oftrust in the workings of the WTO. WhileSouth Asian countries are reducing tariffsand domestic support on a whole rangeof products, the United States, EuropeanUnion and Japan continue to subsidiseand enable their farmers andmultinational corporations to sellagricultural products at lower prices, whilemaintaining higher costs. The farmsubsidies in developed countries hurtdeveloping countries on three counts:first, it keeps the world prices low;secondly, it excludes developing countriesfrom the food markets of rich countries;and finally, developing-country foodproducers suffer due to dumping ofcheap food imports from developedcountries (UNDP 1997). The labour-intensive Southern farmers are at adisadvantage in terms of the economiesof scale realised by the capital-intensiveNorthern farmers. Few measures have sofar been taken to protect the subsistencefarmers and fishermen in the newAgreement on Agriculture (AoA).

South Asian agriculture needs to betreated differently in view of thedependence of most people on agricultureas well as the widespread rural poverty inSouth Asia. ‘India’s most recent proposalto the WTO recommends that anysupport aimed at alleviating poverty, ruraldevelopment or the diversification ofagricultural products be exempted fromWTO-sponsored commitments to reducedomestic support’ (The Economist, June9, 2001).

New issues

Environment and social issues areincreasingly being pushed onto the tradeagenda along with the process andproduction methods (PPMs). PPM-basedrestrictions should not be imposed onresource-strapped Southern economies inwhich some sectors utilise out of date,and perhaps, polluting technology out ofnecessity. As far as labour andenvironmental linkages are concerned,

there are national and internationalmechanisms designed to address theseproblems. A trade regime dealing withexport-related activity is neither anappropriate forum nor an effective deviceto achieve these objectives, as they willbe used by countries to raise non-tariffbarriers and, as some studies suggest,make the situation of child labour andpoverty worse.

• • •

Across the institutions of globalgovernance, there is an urgent need toreassess their current policies in view ofthe socio-economic constraints of poornations. From human developmentperspective, institutional policies ofmultilateral organisations have resulted inincreased deprivation of the poor, risingunemployment and unsustainabledevelopment practices.

In view of the adverse impacts thatglobalisation has had on humandevelopment, the civil society and UNagencies have sought to mitigate themthrough independent activities and/orpartnerships with government institutionsand machinery to improve service deliveryand community development. Suchmovements have been able to cushion theadverse impacts that globalisation and theexisting institutions of global governancehave had on the poor and themarginalised.

Globalisation is wiping away nationalborders and weakening national policies.For the weak and the vulnerable countriesand people, there is need for a strongerrole for national governing institutions forproviding goods, services and protectionthat are not available in the marketplace.There is also a need for compassionateinstitutions of global governance thatwould truly help developing countries tocreate a better future for billions ofpeople living in the developing world.The rising criticism against the IMF andthe World Bank has recently promptedthese institutions to review their policiesas well as to institute a consultative

From humandevelopmentperspective,institutional policiesof multilateralorganisations haveresulted in increaseddeprivation of thepoor, risingunemployment andunsustainabledevelopmentpractices


process with academics, NGOs and othercivil society groups to review theirpolicies and programmes. These areimportant steps forward. But if theseconsultations were to go beyond window-

dressing, these institutions need to rethinkand reform their own governancestructures. We turn to this subject in thenext chapter.


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Towards Humane Globalisation 133

7Towards Humane

Globalisation

What is crucial for poor nations isan equitable access to global marketopportunities, not charity…What wemust insist today is acomprehensive package from richnations for imposing immigrationcontrols since free labour flows weresupposed to be an essentialcomponent of a liberal economicsystem which would equalise globalopportunities.

– Mahbub ul Haq


Globalisation has become an increasinglydominant feature over the past decadesas more countries are getting integratedinto the global economy through tradeand capital flows, and information andcommunication technologies. It is aninevitable process in the efforts of eachnation to accelerate economic growth andmodernise their societies. Although thereare debates about the benefits that poornations can reap from globalisation, thereis no doubt that if some countries chooseto opt out, the potential costs ofbecoming marginalised from the globaleconomy in terms of lost efficiency,technology and growth could be huge.But the positive effects of globalisationon economic growth as well as humandevelopment depend on how theglobalisation process is managednationally and internationally. Throughsensitive management of the globalisationprocess, poor developing countries canleapfrog several decades of developmentwithout putting heavy burden of costs onthe poorer section of their population.

We recognise that the social impact ofglobalisation is more directly linked tonational policies and strategies. Althoughthe policies of global institutions have amajor influence on national policy-making, the extent of their influencedepends on the commitment and capacityof governments at all levels, from nationalto local, to manage their economic andsocial development policies andprogrammes in a socially-responsible way.It is true that the South Asiangovernments need to improve theirgovernance systems in order to enhancetheir productivity, efficiency andcompetitiveness. It is also true that thestabilisation and structural reformprogrammes of the IMF and World Bank,though necessary, can sometimes become

a hand-maiden of policies that negate thepromises of globalisation to increaseeconomic development and reducepoverty.

The 1999 Report on Human Developmentin South Asia underscored the importanceof improving governance in South Asia.Many of the negative impacts ofglobalisation on growth and humandevelopment are due to governancefailures at national as well as global levels.In this chapter we explore how theglobalisation process can be humanisedat both national and international levelsto promote growth with humandevelopment.

National imperatives

Through the UNDP HumanDevelopment reports, Mahbub ul Haqkept on reminding us that growth per sedoes not lead to human development.Growth is important but the nature ofgrowth, its character and distribution arejust as important. A link between growthand human lives has to be createdconsciously through deliberate publicpolicy, such as public spending on socialservices and fiscal policy to redistributeincome and assets. This link may not existin the automatic workings of the markets.This is particularly true in the context ofSouth Asia as this region is the home ofthe highest number of poor and illiteratepeople and malnourished children, withhuge deprivations in all other indicatorsof social development.

The globalisation process erodes thesovereignty of nation states, particularlytheir role in economic decision-making.But in developing countries, the role ofgovernment in economic and socialdevelopment is vital. In South Asia,however, the governments continue to

Positive effects ofglobalisation oneconomic growth aswell as humandevelopment dependon how theglobalisation processis managednationally andinternationally

Chapter 7

Towards Humane Globalisation


play a dominant role in economic andsocial sectors, with poor outcomes. Yetan exclusive focus on the market mayleave the poor out in the cold. Thechallenge is to balance the goals ofeconomic growth with those of humandevelopment. What will it take for SouthAsia to develop policies that increase itsbenefits from globalisation whileimproving the lives of the vast majorityof the people. South Asia needs to makesustained efforts in four broad policyareas. These are: (a) accelerating humandevelopment, particularly education; (b)reducing poverty; (c) enhancingintegration with the regional and globaleconomic system and; (d) improvingeconomic management.

Accelerate human development

Education and skill training is the mostimportant component of this. Knowledgeand technology rules the global market.Without underestimating India’s recentsuccess as being one of the high-technology centres of the world, SouthAsia’s education indicators, even at theprimary and secondary levels, lag behindmost developing regions. South Asia as aregion produces very few people withtechnical skills to produce goods andservices of higher quality and productivityto compete with the global market. Thelimited number of IT-trained people thatSouth Asia produces each year is lost tothe region because of their demand indeveloped countries. The region needs toimprove both the quantity and quality ofeducation at each level, from primary,secondary to tertiary. This is critical fordeveloping relevant skills for adapting toa changing world market demand.

Of course the first essential step isuniversal primary education. This is thefoundation on which the secondary andtertiary education and skill training canbe built. But as we have seen in chapter3, during 1995-99, 46 per cent of childrenin South Asia did not complete primaryeducation. Of the secondary school-agechildren, less than half—44 per cent—

enrolled for secondary education in 1996.In 1998, the combined enrolments at allthree levels were only 51 per cent; andonly 22 per cent of tertiary enrolment wasfor natural and applied sciences. Whilethe competition in the global marketplacedemands higher levels of education andskill training, the quantity and quality ofeducation in South Asia have a long wayto go, despite islands of highly-skilledpeople and institutions.

South Asia must prepare its labourforce to face the global competition.Central to this is the strategy to providequality primary education to all school-age children, provide them skill-training,and also cater to the needs of the higherlevels of education in new technologies.While the governments should allocatesufficient resources for primary andsecondary education, private sectorshould be mobilised to set up technicalinstitutions for imparting training for thenew market demand.

Public funding of education has to beincreased on primary and secondaryeducation, while leaving the technical andhigher levels of education to the privatesector, with liberal scholarships for thefinancially-needy students. But theeducation budget, both as a percentageof GDP and of the total central andstate/provincial government budgets, hasto be increased in order to provide betteraccess to and improve the quality ofeducation.

Reduce poverty

In the wake of globalisation, poverty inSouth Asia is either rising or stagnating.This underscores the urgency ofmainstreaming the governments’commitment to reduce poverty. Formacro-economic policy, this means muchmore than just promoting economicgrowth. Poverty reduction strategies mustbe built into the macro and micropolicies. Globalisation policies to focuson cash crops instead of food crops, andcapital-intensive rather than labour-intensive industries need to be analysed

South Asia mustprepare its labourforce to face theglobal competition


to assess their impact on the poor, therural areas, food security and employmentgeneration.

Recent evidence suggests that India’sdecade-old economic reforms haveincreased economic growth but have notmade much progress in reducing poverty.The economy grew at over 7.5 per cent ayear in the mid-1990s, but the proportionof people living in poverty dropped byone percentage point from 1993-94 to1997. In rural areas where most Indianslive the poverty reduction was even less.The rate of poverty reduction in pre-reform era was faster. Despite the factthat there is some confusion about thetwo sets of data used to calculate poverty,consumption of the poor has declineddue to higher food prices as a result ofeconomic reforms. Food prices haveplayed an important role in determiningthe absolute poverty in India , along withthe availability of productive employmentopportunities. Non-agricultural employ-ment generation has been lower over the1990s than it was in the previous decade.In Pakistan, all evidence points towardslow growth in the 1990s, accompaniedby rising levels of poverty in both urbanand rural areas.

Governments must prioritise the needsof the poor to overcome mass humandeprivation. The backlog of suchdeprivation is huge, as we present in thisreport (see table 9 on page 171). Arealistic human development agendashould be designed and implemented byeach country. The minimal aim of SouthAsian governments should be to protectthose who get bypassed by the marketsand crushed by the reform programmes.This requires social safety nets that arenot only efficient in their reach but alsoadequate in their coverage.

While the state should look after thewelfare of the poor, the real focus shouldbe on empowering people. But the poormay not benefit from the market if theyhave no access to productive assets, suchas land and credit. In South Asia suchassets are highly skewed. An effectiveland reform policy is the best answer to

such a situation. The impact of landreforms in reducing poverty is decisive,one-tenth of the reduction of poverty inIndia between the period 1958-92 hasbeen attributed to the implementation ofland reforms. Another practical way ofempowering the poor is through theprovision of micro-credit. Many micro-credit programmes are beingimplemented in South Asia by the publicsector and the NGOs.

Enhance integration

Continued export growth is essential tobenefit from globalisation. This requiresdiversifying into goods and services forwhich demand is sufficiently elastic,namely those with higher technologicalcontent. But from the point of view ofemployment generation, South Asia needsto continue in more traditional labour-intensive, low technology exports, as wellas diversify into more high-technologygoods and services. India’s success inestablishing a niche for itself in the fast-growing global software and informationtechnology market demonstrates thatsuch diversification can be achieved, butrequires increasing investments in humancapital to develop appropriate factorendowments.

A source of huge potential benefit forsustaining trade integration in the regionlies with increasing the share of officialintra-regional trade. As pointed out inchapter 5, the level of such trade is verylow, and the potential gains from greaterintra-regional trade are large, not only interms of economic gains, but also interms of deepening regional economicand political cooperation. In this respect,more attention needs to be focussed infostering regional trade links, particularlyin India, which, despite much progress inliberalisation, remains relatively protected,with a low level of import penetrationfrom other countries in the region.

A key to sustain and increase capitalflows to the region, is to maintain afavourable macroeconomic environment.Sound economic fundamentals, such as

Governments mustprioritise the needsof the poor toovercome masshuman deprivation


low inflation, stable exchange rates andlow fiscal deficits, are crucial for attractingforeign investors and increasing access toprivate capital markets. A major challengewill be to increase South Asia’s share ofsuch flows. As shown in chapter 2, SouthAsia’s share of the developing-countrytotal has stagnated during the 1990s.

Policies to sustain economic growthand increase export orientation will benecessary, as well as making nationalinvestment regimes more open andtransparent. Careful attention needs to befocussed on the exact nature of FDIinflows. Those directed to themanufacturing and export sectors arelikely to bring the most benefits thanthose based on mergers and acquisitionsstemming from privatisation programmes.

To sustain economic integration,simply increasing the level of trade andcapital flows to the region, however, isnot enough. Reduction of the risksinherent in greater economic openness isalso fundamental to any such efforts. Theexisting composition of exports in mostcountries of South Asia is highlyconcentrated in terms of products as wellas geographic regions. Thus, diversifyingexport products and markets are essentialsteps to reduce the vulnerability of exportearnings.

Short-term volatility of capital inflowscan seriously destabilise the economy andsociety. Greater attention, therefore,needs to be paid to the composition andmaturity of capital flows, with the aim ofdecreasing the region’s reliance on short-term debt and portfolio investment flows.Minimising such risks also requiresstrengthening prudential regulations andeffective bank supervision to avoidirresponsible exposure to excessiveexternal borrowing. In most countries,such safeguards remain weak.

Improve economic management

The globalisation process in South Asiahas been initiated and facilitated by aseries of economic reform programmesundertaken under the umbrella of the

IMF and World Bank. Although thesereforms have made South Asia a moreopen and less distortionary region, therecord of reform has not been anunqualified success. Several governanceand institutional failures have diluted theefficiency of the reform programme.

First, economic reforms remainincomplete and their implementationremains slow and hesitant. Governmentscontinue to play a dominant role in majoreconomic activities. Also, externalliberalisation has not been accompaniedby internal or regional liberalisation.While trade with the outside world isgetting freer, trade within the region isstill very limited. Domestic financialsector reforms are incomplete. Publicsector banks are still burdened with alarge stock of non-performing loans.Deficit reduction is slow. There has beena relatively higher emphasis on reducingdevelopment expenditure and subsidiesmeant for the poor than on mobilisingadditional resources by taxing the rich andcutting non-development expenditure.Sometimes progress made by the centralgovernments is negated by a lack ofperformance at the state/provincial andlower levels.

Secondly, the institutions needed toassist the economic transition are eithermissing or remain weak. Marketregulations to protect the poor and thevulnerable are either weak or non-operative. There have been limited legalreforms to aid the economic transition.The judicial system is also weak inprotecting private property rights andenforcing business contracts.

Thirdly, in many parts of South Asiathe burden of structural adjustment hasfallen mostly on the poor. Whenevergovernment tries to balance the budget,social expenditures are the first victims,and within social expenditures primaryeducation, primary healthcare and foodsubsidies to the poor are the worst hit.

Fourthly, economic reforms have onlytouched the price structures, not thestructures of economic and politicalpower. Markets may discriminate against

Reduction of therisks inherent ingreater economicopenness is alsofundamental


the poor, if productive assets like landand capital are badly distributed, and if apowerful rentier class has access to alleconomic opportunities. If economicadjustment has to be meaningful, it mustbe accompanied by social adjustment.Countries must spend as much time oncorrecting social fundamentals as oncorrecting economic fundamentals(MHHDC 1999). The globalisationprocess itself does not consider theseissues, hence the backlash by civil societygroups at the meetings of the globaleconomic managers.

Global imperatives1

Can globalisation be better managedinternationally? This is an issue thatdeserves the kind of intellectual fermentthat Keynes generated about globalgovernance in the 1940s when theglobalisation process was not as pervasiveand strong a phenomenon in the globaleconomy as it is today. Despite excellentwork done by several scholars includingHans Singer, Mahbub ul Haq, NobelLaureate James Tobin and many others,powerful nations are giving very littlethought to the necessity of reforming theexisting institutions of global governanceor creating new ones.

As discussed in chapter 6, during thelast fifty years while globalisation hasbecome stronger, the role played by theinstitutions of global governance isincreasingly becoming marginal. Thecurrent global economic management isfailing to eliminate large fluctuations ineconomic activities, prevent hugesurpluses and deficits from arising, andstop speculative capital movements. Atthe Bretton Woods conference in 1944,Keynes had intended for the institutionsto perform these functions. But theinstitutions, the IMF and World Bank,that were created at Bretton Woods, donot almost in any way fulfil their intended

role. As private capital flows dominatethe development finance, the IMF andWorld Bank have been marginalised. Yetthey exercise overwhelming influence onthe macro and micro economic policiesof developing countries.

At present, several forums perform therole of global economic governance inone form or another, often withoverlapping mandates:• Group of 8, composed of the mostpowerful nations, set the tone for theglobal financial and monetary policy intheir annual summits. But the issues thatthe G-8 normally considers fall within anarrow range of macroeconomicmanagement. The issues of pressingconcern to developing countries fall, ingeneral, outside the purview of G-8although in recent summits of G-8,poverty and debt of the least developedcountries have attracted some attention.But meaningful actions on these frontsare yet to be taken on a scale that wouldmake a difference to the people in thesecountries.• Development and Interim Committeesof the World Bank and IMF representboth industrialised and developingcountries. But these forums do not enjoythe power and the clout of G-8, and theiragendas are more narrowly focused onissues of concern to the World Bank andIMF.• The Economic and Social Council ofthe UN (ECOSOC) deliberates on manyof the socio-economic issues that are atthe top of the global agenda. But theforum has neither the financial resourcesnor the technical capacity to be takenseriously by the global financial managers.

To humanise globalisation, it isimportant to consider ways to eitherreform the existing institutions of globalgovernance, or to create new ones. Webelieve the world community is readynow, in view of massive demonstrationsat the meetings of G-8, IMF, World Bankand WTO, to think seriously aboutcreating two new institutions—(a) aWorld Central Bank, (b) an EconomicSecurity Council, and (c) an innovative

Current globaleconomicmanagement isfailing to eliminatelarge fluctuations ineconomic activities,prevent hugesurpluses anddeficits from arising,and stop speculativecapital movements

1 Arguments in this section have been drawn fromMahbub ul Haq’s writings see e.g., M. Haq 1995, M. Haqet al . 1995 and 1996.


mechanism to control the volatility ofshort-term financial flows.

(a) The world has no credible lenderof last resort at the global level whichcan bail out countries from short-termliquidity crisis, without inflicting long-term economic damage. Central banksperform this role at the national level.There is a need today for a World CentralBank to maintain steady growth of worldoutput, prevent emergence of massiveimbalances, recycle funds from surpluscountries to deficit countries and avoidlarge exchange rate fluctuations. Thesefunctions have to be performed withoutmaking the poor countries sacrifice eithergrowth or human development.

(b) Globalisation has also led to aseries of serious threats to human securityranging from new diseases, drugs, crime,environmental degradation, unemploy-ment to rising poverty. While globalpolitical issues are discussed at the UNSecurity Council, there is no global forumto discuss the economic and social issues,although ECOSOC and various UNagencies deal with these issues in afragmented manner. The proposal toestablish an Economic Security Counciloffers an opportunity to design a newframework for addressing globaleconomic and social issues to serve theinterests of all nations. The imperativesof global human security can only beaddressed by such a council. Many globalissues need global strategies and globalactions. Global macroeconomiccoordination, particularly monetary andfinancial, cannot be left to G-8 as it doesnot represent the voices of the poornations and poor people. In 1945, the USSecretary of State said in the report tothe US President on the establishment ofthe United Nations, ‘No provisions that canbe written into the Charter will enable theSecurity Council to make the world secure fromwar if men and women have no security in theirhomes and their jobs.’ (as quoted in M. Haq1995).

An Economic Security Council can fillthe following gaps: first, it can provideleadership in tackling the shared global

concerns such as poverty andenvironmental insecurity; second, it couldhelp establish an early warning system andthe modalities for global assistance inconflicts within nations; third, it couldprovide policy leadership onmacroeconomic management.

(c) Finally, in view of excessivevo la t i l i t y of shor t - t e rm cap i ta l ,Prof. James Tobin’s proposal to levy asmall tax on speculative currencytransactions deserves special attention ofthe international community. The aim ofTobin Tax is to slow down speculative,short-term capital flows. This has thepotential to increase the autonomy ofnational authorities for monetary andmacroeconomic policies, with a bit moreindependence from the effects ofinternational money markets. This will beparticularly valuable to developingcountries since their economies adapt lesseasily to external shocks and their thinnerfinancial markets are more vulnerable tothe impact of external capital inflows andoutflows. National tax authorities couldcollect the tax, and proceeds could beshared between the national and globalinstitutions of governance for promotinghuman development and reducing poverty.

Role of civil society and private sector

Civil society, comprised of the media,trade unions, professional associationssuch as lawyers, doctors, teachersassociations, and NGOs, can serve awatchdog function by monitoringactivities and development policies onhuman development and povertyalleviation of national and internationalinstitutions of governance. While NGOsin South Asia have been able to targetand access groups better than governmentor international actors, their record ofcost effective service delivery has beenmixed. In order for the NGOs to beeffective in counterbalancing negativeimpacts of globalisation, cost effective-ness of their operations is important. Itis, however, critical that activegovernment and civil society cooperation

The world has nocredible lender oflast resort at theglobal level whichcan bail outcountries from short-term liquidity crisis


take place in South Asia in all spheres ofactivity, from rural support to policyresearch to covering multilateralnegotiations and WTO meetings.

At the global level, civil society forceshave been active in organisingdemonstrations at the meetings ofmultilateral institutions. Their voices havebeen drowning the official deliberationsat each meeting. However, it remains tobe seen how beneficial these meetings aregoing to be for the poor people in poornations.

The acute problems facing labourworldwide, as a result of globalisation,have been brought up by trade unionsand other labour organisations at theinternational level. The spread oftechnology has allowed networks todevelop across borders. These networkslobby for labour rights and have activelyopposed the negative effects ofglobalisation. Similarly, mediaorganisations and journalists across theworld have an invaluable role to play topromote humane globalisation.

The problem, however, is in creating acritical mass of support and awarenessamongst the larger public for the issuesthat affect them at local, national, regionaland global levels. There is a need to linkstruggles for social justice together. InIndia, Bangladesh and Sri Lanka, people’smovements have developed that draw onall these civil society actors to resistaggressive actions from private and state-level actors. In a globalising world, suchcivil society movements present perhapsthe best method of guarding againstdisproportionate burdens being placed onthe poor. However, it is important forcivil society to strengthen itselfsufficiently and also to look beyondnational borders. In much the same waythat South Asian states need to worktogether to mitigate the impacts of newtrade regimes, civil society in South Asiamust work together on issues of commonconcern.

The business community isacknowledged as one of the chief playersin providing jobs and generating income.

While the private sector needs adequateincentives to expand and fuel economicgrowth, its market power and politicalinfluence necessitates regulations andguidelines in order to promote humaneglobalisation. In this regard, twofollowing initiatives will be useful:• A new framework for government-business cooperation to increaseincentives for private sector innovation,transparency and accountability. A healthyexpansion of South Asia’s private sectorrequires greater trust and cooperationbetween the government and the businesscommunity. Policies that would addressthe concerns of both private sector andthe people could only be achievedthrough mutual consultation. Such aprocess would lead to consensus-buildingand greater public-private partnerships inimplementing policies.• Guidelines for corporate socialresponsibility. Corporate social responsi-bility extends beyond organisationaloperations and encompasses thecommunity where a business operates, aswell as the region which it serves.Voluntary guidelines for corporate socialresponsibility, prepared collectively orindividually by businesses, couldencourage the private sector to take civicaction on issues ranging from businessethics and environmental responsibility tosocial development. For their part,governments could offer incentives tothose corporations that invest a certainpercentage of their profits in socialresponsibility programmes (MHHDC1999).

• • •

We started this report by raising someissues that needed to be addressed in thecontext of globalisation and humandevelopment. At the end of our analysis,we conclude that• Participation and benefits ofglobalisation have so far been limited toa small segment of educated and skilledpopulation and private-sectorentrepreneurs.

Civil societymovements presentperhaps the bestmethod of guardingagainstdisproportionateburdens beingplaced on the poor


• South Asian countries and their peopledo not have full access to theopportunities of trade as non-tariffbarriers and agricultural subsidies in thedeveloped countries stand in the way ofoptimising benefits from trade. Also,labour is not fully mobile, except thehighly-trained professional class.• New technologies have expanded thechoices of professionals, researchers andstudents to improve their knowledge andjob opportunities. New technologies havealso tended to reduce gender disparitiesby enhancing women’s education, trainingand job opportunities in IT-enabledsector.• Economic expansion, associated withglobalisation, is creating jobs in narrowfields—in high technology such asinformation/communication, and in lowtechnology such as garment factories. Allother areas of economic activity, liketraditional manufacturing, agricultural andnon-farm activities, are not experiencingany increase of jobs. Globalisation-ledgrowth has, in most cases, not been job-led growth.• Markets have been free in the negativeway, in raising prices of goods andservices, hurting the poor withoutproviding any opportunity for them toearn more income. Also, imports arerising without the simultaneous increaseof exports, consumption patterns arechanging from traditional food andbeverages to fast foods and drinks.

The proponents of globalisation wouldargue that if China can gain so much fromglobalisation, why can’t South Asia,especially the smaller countries. China hadthe social fundamentals in place before itstarted opening to the world economy.More importantly, we are not arguing

against globalisation, we only want tounderline its pitfalls, as the East Asianexperience has pointed out (see box 7.1),and to ensure the sustainability ofglobalisation by enhancing and protectinghuman development in South Asia.

South Asian countries are at acrossroad, well placed to accelerateglobalisation and growth, but laggingbehind most other developing regions.The unexploited potential for greaterintegration and growth in South Asia islarge, and the future may well bring fastergrowth from globalisation. The degree towhich it will be able to take full advantagedepends on the commitment of SouthAsian countries to reduce regionalhostilities and continue integrating, whilepaying closer attention to minimising theassociated risks.

Box 7.1 Globalisation: Lessons South Asia could learn from theEast Asian crisis

There are several lessons for SouthAsia from the recent East Asian crisis:

• Trade liberalisation is good for aneconomy. However, financialliberalisation should only beundertaken cautiously and after propersequencing.• If ‘hot flows’ of capital are to beallowed, they should be monitoredcarefully and managed properly. Asdemonstrated by the Tequila and EastAsian experiences, rapidly expandingshort-term debt financed by ‘hot flows’can harm domestic economies.• The exchange rate system followed,whether fixed or flexible, shouldreflect the economic fundamentals ofthe country.

• Transparency, absence ofpoliticisation and prudentialregulation must exist in the financialsector.• Proper data reporting is a must—if only to accurately assess thefinancial state of an economy.• Industrialisation should bediversified, decentralised and ruraloriented, not urban concentrated.• An active and free domesticmedia is a necessity. A more realisticpicture of an economy can only beof benefit to all parties—whetherdomestic or foreign. If the mediahighlights deficiencies in a nationaleconomy, it should be viewed not asa threat, but as an opportunity tocorrect mistakes and weaknesses.

Source : MHHDC 1999.


BLANK

142

References 143

Chapter Divider Quotations byMahbub ul Haq

Chapters 1, 2, 3, 4 and 6Haq, M. 1995a. Reflections on HumanDevelopment. New York: Oxford UniversityPress.

Chapter 5Haq. M., R. Jolly, P. Streeten and K. Haq.1995b. The UN and the Bretton WoodsInstitutions: New Challenges for the Twenty-First Century. London: Macmillan Press.

Chapter 7Haq, M. 1994. Barbara Ward Lecture. SIDConference, Mexico.

Background Papers

Ghosh, Jayati. 2000. ‘Impact ofGlobalisation: India.’

Devaki Jain, Seeta Prabhu and SandhyaV. Iyer. 2000. ‘Social Impact ofGlobalisation.’

Bibliographic Note

Chapter 1 draws on the following: Abonyi andThant 1996; Burki and Savitsky 1999; Haq 1995a;IMF 2000; Nayyar 1998; Streeten 1998; UNCTAD1999d; UNDP 1997; UNDP 1999; Valaskakis1999; World Bank 2000b; World Bank 2000c; andWorld Bank 2001.

Chapter 2 draws on the following: Bhagwati1993; Blomstrom, Lipsey and Zejan 1994; Claessens,Demirguc-Kunt and Warner 1995; Corbo andHernandez 1996; ESCAP 1997a; ESCAP 1997b;ESCAP 1998a; ESCAP 1998b; ESCAP 1999;ESCAP 2000; IMF 1999; Institutional Investor(various issues); Kemal 2001; Nayak 1995;Panagariya 1998; Srinivasan 1998; Haque and Kardar1995; UNCTAD 1996; UNCTAD 1998; UNCTAD1999a; UNCTAD 1999b; UNCTAD 1999c; WorldBank 1997a; World Bank 1999b; World Bank 1999c;and World Bank 2000a.

References

Chapter 3 draws on the following:Abeyewickreme and deSilva 2000; Ahmad 1994;Anant, Sundaram and Tendulkar 1999; Bhatta1994; Chelliah and Sudarshan 1999; Dev 2000;DFID 2000; Dharmalingam 1994; Duruvasula1992; ESCAP 1995; ESCAP 1996; Fernando 2000;Ghaffar, Kazi, and Salman. 2000a; Ghaffar, Kaziand Salman. 2000b; Gharana-Guru 1996; GOI1999c; GOI 1999d; GOI 2000; Hawkes and Azim2000; Hirway and Mahendra Dev 2000; ILO 2000;ILO 1999; ILO 1995; ILO 1993; Lakshman 1996;Maniar 2000; Nadkarni 2000; Naqvi and Mahmood1996; Persson and Tabellini 1994; Prabhu 1996;Prahbu and Iyer 1999; Prabhu and Iyer. 2000;Prabhu 2001; Qadeer and Roy 1989; Qadeer 2000;Rahman and Sen 1997; Reza and Mahmood 1996;SAARC 1992; Sharma 1997; South Asia PovertyMonitor 1997a, 1997b; Standing 1999; Streeten1999; UNDP 1991; Vaughan, Karim and Buse2000.

Chapter 4 draws on the following: Abdelati,Nagaoka, Sidgwick, Lonnberg and Zveglich 2000;Acharya, Thapa and Sharma 1998; ADB 1997;ADB 1998; Adhikari; Ali and Tahir 1999; Amjadand Kemal 1997; Arif 2001; EIU 1999; EIU 2000;ESCAP 1999a; ESCAP 2001; Ghosh 1998; GOB1996; GOB 1998; GOP 1977; GOP 1988; GOP1994; GOP 1999c; GOS 2001; Gupta 1999; HMGNepal 2000; Hasan 1998; Husain 1999; IMF1999a; IMF 2001a; Irfan and Amjad 1983; Irfan2001; Khan 2000; Mahendra 2000; Malik 1988;Mujeri 2001; Qureshi and Arif 1999; Rijal 2000;Sarvekshana; Shand 1999; World Bank 1985;World Bank 1988; World Bank 1989; World Bank1996; World Bank 1998; World Bank 1998a;World Bank 1999d; World Bank 2000; and WorldBank 2001;

Chapter 5 draws on the following: Coe,Helpman and Hoffmaister 1997; Debroy 1998;ESCAP 1994; SAARC 1998; Safidi and Yeats 1993;Srinivasan 1994; Srinivasan and Canonero 1993;Thakur 1994; and World Bank 1999c.

Chapter 6 draws on the following: Burki 2001;Debroy 1998; Ghosh 1998; Haq, Jolly and Streeten1995b; ILO 1998; Kelegama 2000; Khan 1998;Martin and Winters 1995; MHHDC 1997; Nagaraj2000; Ribe and Carvalho 1990; Singer 1995; Stiglitz2000; UNCTAD 1999b; UNCTAD 1999c;UNCTAD 2000a; UNCTAD 2000b; UNDP 1997;and Woods 2000.

Chapter 7 draws on the following: Haq, M.1995a; Haq, M., Streeten, Jolly and Haq, K. 1995b;Haq, Kaul and Grunberg 1996; and MHHDC1999.


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BLANK

150

Statistical Profile of Globalisation in South Asia 151

Statistical Profile of Globalisationin South Asia


Contents

Note on statistical sources for globalisation tables 153

Table 1: Trade Flows 154• Trade/GDP ratio (PPP adjusted level, %)• Annual average change in trade/GDP ratio (%)• Exports of goods and services (US$ millions)• Exports of goods and services (as a % of GDP)• Imports of goods and services (US$ millions)• Imports of goods and services (as a % of GDP)• Mean unweighted tariff rates(%):

– all products;– primary products;– manufactured products

Table 2: Resource Flows 155• Net foreign direct investment flows (US$ millions)• Net portfolio investment flows (US$ millions)• Net bank and trade related lending (US$ millions)• Net official development assistance (ODA) or official aid

(US$ millions)• Aid per capita

Table 3: Information Flows 156• Main telephone lines (per 1,000 people)• Fax machines (per 1,000 people)• Personal computers (per 1,000 people)• Internet hosts (per 10,000 people)• Internet users (thousands)• Mobile telephones (per 1,000 people)• Public payphones (per 100,000 people)

Table 4: Selected Economic Indicators 157• GNP per capita (US$)• GNP per capita (PPP$)• GNP per capita average annual growth rate (%)• Tax revenue (as a % of GDP)• Average annual rate of inflation• Agriculture (as a % of GDP

Table 5: Environment and Globalisation 158• Average annual rate of deforestation (%)• Total carbon dioxide emissions (millions of metric tons)• Carbon dioxide emissions (% share of world total)• Carbon dioxide emissions per capita (metric tonnes)• Annual internal renewable water resources (cubic metres

per capita)

• Export structure:– food exports (% of total exports);– agricultural raw materials (% of total exports);– manufacturers (% of total exports)

• Aid as a % of GNP• External debt• Present value of debt as % of GNP• Total debt servicing (% of GNP)• Total debt servicing (% of exports of goods and services)

• Televisions (per 1,000 people)• Cable subscribers (per 1,000 people)• Daily newspapers (per 1,000 people)• International tourism departures (thousands)• Patent applications filed:

– residents;– non residents

• Industry (as a % of GDP)• Services (as a % of GDP)• Percentage labour force employed in:

– agriculture;– industry;– services

• Annual fresh water withdrawals (as a % of water resources)• Annual fresh water withdrawals per capita (cubic metres)• Annual internal renewable water resources (cubic metres

per capita)• Printing and writing paper consumed (kilograms per capita)


Note on Statistical Sources forGlobalisation Tables

The special globalisation data for this reporthave been collected from variousinternational sources. Principle internationalsources include the UN system and theWorld Bank. For instance, data on trade,foreign direct investment, GNP and debthave mostly been collected from the WorldBank. Indicators for environment andinformation flows were compiled mainlyfrom the UNDP and InternationalTelecommunication Union’s reportsrespectively.

Since regional internationalcomparability is limited for dataobtained from national sources, seriouseffort has been made to use internationaldata wherever available. Even thoughdata in international sources is not ascurrent as the one available in nationalsources, preference was given to theformer due to the nature of the datarequired. There is however, a scarcity ofinternational and national data for bothBhutan and the Maldives.

Extra care has been taken to ensurethat the information provided in thetables is both reliable and consistent.

Certain data have been specificallycompiled for the purpose of this reportsuch as the data on trade flows, resourceflows and information flows. It shouldbe noted that weighted average for SouthAsia has been computed using countrypopulation figures as weights. It is hopedthat such a compilation of data for SouthAsia would be useful for policy-makers,researchers, and students interested inglobalisation issues.

Often, the latest reliable data remainunavailable for several importantglobalisation indicators such as the lossor gain resulting from reduction in tariffs,subsidies and customs duties, labourremittances and labour movements.There is an urgent need for up-to-dateand accurate data on globalisation inorder to analyse globalisation issues asobjectively as possible.


1. Trade Flows

South AsiaIndia Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives (weighted

average)

Total trade

Trade/GDP ratio (PPP adjusted level, %)1990-98 3.6 9.1 5.6 6.6 15.7 21.5 34.9 4.7

– annual average change (%) 1990-98 1.4 -1.3 4.8 3.9 5.5 -0.6 0.8 1.3

Exports of goods and services 1999

Total (US$ millions) 54047 8838 6031 1150 5566 120 ... 42952.3

– as a % of GDP 12 15 13 23 35 31 ... 13

Imports of goods and services 1999

Total (US$ millions) 67250 11688 8527 1496 6717 160 ... 53614

– as a % of GDP 15 20 19 30 43 42 ... 16.6

Mean unweighted tariff rates (%) 1999

– all products 32.2 46.5a 22 17.7 20.1b … … 32

– primary products 30.5 42.7c 22.4 12.9 23.9d … … 30

– manufactured goods 32.4 46.9e 22 18.9 19.7f … … 32

Export structure

Food exports (% of total exports)

– 1990 3 17 19 15 19 23 … 6.6

– 1999 9 17 15 12 15 … … 10.5

Agricultural raw materials (% of total exports)

– 1990 4 4 5 7 2 8 … 4.1

– 1999 3 6 5 7 1 … … 3.5

Manufactures (% of total exports)

– 1990 51 54 56 67 65 40 … 52.3

– 1999 54 53 69 42 77 … … 55.4

Notes:a, c & e: year 1998; b, d & f: year 1997.

Source: Row 1: World Bank 2000c; Rows 2, 3, 4 & 5: World Bank 2001.


2. Resource Flows


average)

Net foreign direct investment flows(US$ millions)

– 1990 162 244 0 6 43 … 1 128.4

– 1999 2169 530 225 4 177 … 7 1738.7

Net portfolio investment flows (US$ millions)

– 1990 252 0 0 0 0 0 0 198.6

– 1998 4462 0 3 0 71 0 0 3421

Net bank and trade related lending (US$ millions)

– 1990 14538 -63 67 -14 10 … -3 11463

– 1999 -532 -521 15 -13 -74 -2 7a -460

Net official development assistance(ODA) or official aid (US$ millions) 1999 1484 732 1203 344 251 56b 25c 1338

– aid per capita 1999 1 5 9 15 13 … … 2.6

– aid as a % of GNP 1999 0.3 1.2 2.5 6.7 1.6 … … 0.7

External debt 1999

– US$ millions 94393 34423 17534 2970 9472 120 180d 77665

– present value of debt as % of GNP 16 43 23 32 45 32.1e 58.1f 20.1

Total debt service 1999

– percentage of GNP 16 43 23 32 45 … … 20.1

– percentage of exports of goods andservices 104 252 140 122 104 … … 122.9

Notes:a, b, c, d, e & f: year 1998

Source: Row 1&6: World Bank 2001; Rows 2: UNDP 1999, UNDP 2000; Rows 3, 4 & 5: World Bank 2001, UNDP 2000.


3. Information Flows


average)

Main telephone lines (per 1,000 people) 1999 27 22 3 11 36 9a 57b 24

Fax machines (per 1,000 people) 1999 0.2 2 … 0.4 … 1.7c 14.3d 0.4

Personal computers (per 1,000 people) 1999 3.3 4.3 1 2.7 5.6 4e … 3.2

Internet hosts (per 10,000 people) 2000 0.32 0.4 0 0.35 0.91 … … 0.31

Internet users (thousands) 1999 2800 80 50 35 65 … … 2157

Mobile telephones (per 1,000 people) 1999 2 2 1 0 12 … … 2

Public payphones (per 100,000 people)1996-98* 0.4 0.2 … … 0.2 … … 0.3

Televisons (per 1,000 people) 1999 75 119 7 7 102 … 40f 72

Cable subscribers (per 1,000 people) 1999 37.1 0.1 … 2.9 0 … … 28.4

Daily newspapers (per 1,000 people) 1996 30 21 9 11 29 … 10 27

International tourism departures (thousands)1997-98 3811 … 992 110 518 … 37 3029.9

Patent applications filed 1998

– Residents 2111 16 32 … 81 … … 1623.8

– Non-residents 7997 782 184 … 34974 … … 6735.2

Notes:* data refer to the most recent year available during the specified perioda & b: year 1997; c: year 1996; d: year 1995; e: year 1996-98; f: year 1997.

Source: Rows 1, 2, 3, 5, 6, 8, 9: ITU 2000, UNDP 2000, UNDP 1999 & MHHDC 1999; Rows 4 &12: World Bank 2001;Rows 7 & 11: UNDP 2000; Row 10: MHHDC 1999.


4. Selected Economic Indicators


average)

GNP per capita (US$) 1999 440 470 370 220 820 510 1200 438

GNP per capita (PPP$) 1999 2230 1860 1530 1280 3230 1260 … 2118.3

GNP per capita average annual growthrate (%) 1997-98 4.3 0.5 4.2 0.3 3.3 2.4 4.4 3.8

Tax revenue (% of GDP) 1999 9.1 13.1 … 8.5 14.9 … … 8.7

Average annual rate of inflation (%)

– 1990-98 8.9 11.1 3.6 8.9 9.7 9.7 8.2 8.6

– 1998 8.9 7.8 5.3 3.3 8.8 5.9 0.8 8.3

Agriculture ( as a % of GDP)

– 1993 31 25 30 43 25 42 … 30.4

– 1998 29.3 26.4 22.2 40.5 21.1 38.2 16 28.4

Industry (as a % of GDP)

– 1993 27 25 18 21 26 27 … 25.8

– 1998 24.7 24.7 27.9 22.2 27.5 36.5 … 25

Services (as a % of GDP)

– 1993 41 50 52 36 50 31 … 43

– 1998 45.9 48.9 49.9 37.3 51.4 25.4 … 46.5

Percentage labour force employed 1997

– agriculture 60.1 45.5 60.1 93.8 46.3 94 20.2 59

– industry 18.1 21.5 21.8 0 22.9 0.5 32.7 18.5

– services 21.8 33 18.1 6.4 30.8 5.5 48.1 22.4

Source: Rows 1, 2, 3 & 4: World Bank 2000 & 2001; Rows 5: UNDP 2000; Rows 6, 7 & 8: UNDP 1996 & UNDP 2000; Row 9: ILO 1998.


5. Environment and Globalisation


average)

Average annual rate of deforestation (%)a

– 1980-90 -1.1 3.1 1.8 0.9 1 0.6 … -0.4

– 1990-2000 -0.1 1.1 -1.3 1.8 1.6 0.3 … -0.06

Carbon dioxide emissions 1997

– total (millions of metric tonnes) 1065.4 98.2 24.6 2.2 8.1 0.3 0.3 829.7

– share of world total (%) 4.2 0.4 0.1 … … … … 3.3

– per capita (metric tonnes) 1.1 0.8 0.2 0.1 0.4 0.2 1.1 0.95

Annual fresh water withdrawals 1987-97 *

– as a % of water resources 39.7 183.6 13.9 14.6 19.5 0 11.2 55.3

– per capita (cubic metres) 588 1269 134 1397 573 13 17 678.2

Annual internal renewablewater resources(cubic metres per capita) 2000b 1244 542 813 8282 2656 44728 105 1345.6

Printing and writing paperconsumed(kilograms per capita) 1997 2.2 1.4 1.1 0.1 2.8 0 3.8 1.9

Notes:

* data refer to the most recent year available during the specified perioda:a positive number indicates a loss of forest area, a negative number a gainb:these annual averages disguise large seasonal, interannual and long-term variations

Source: Row 1: World Bank 2001 & UNDP 2000; Row 2: World Bank 2001; Rows 3, 4 & 5: UNDP 2000.

Human Development Indicators for South Asia 159

Human Development Indicatorsfor South Asia


Contents

Note on statistical sources for human development indicators 162Key to indicators 179Table 1: Basic Human Development Indicators 163• Estimated population• Annual population growth rate• Life expectancy at birth• Adult literacy rate• Female literacy rate• Combined first, second and third level gross

enrolment ratio

Table 2: Trends in Human Development 164• GNP per capita• Real GDP per capita• Human Development Index (HDI)• Life expectancy at birth• Gross enrolment ratio for all levels

Table 3: Education Profile 165• Adult literacy rate• Male literacy rate• Female literacy rate• Gross primary enrolment• Gross secondary enrolment• Combined enrolment for all levels

Table 4: Education Indicators in India by State, Rural/Urban,and Gender 166

• Adult literacy rate• Female literacy rate• Male literacy rate• Primary net enrolment ratio• Female primary net enrolment ratio

Table 5: Education Indicators in Pakistan by Province,Rural/Urban, and Gender 167

• Adult literacy rate• Female literacy rate• Male literacy rate• Primary net enrollment ratio• Female primary net enrollment ratio

Table 6: Education Indicators in Bangladesh by District,Rural/Urban, and Gender 168


Table 7: Education Indicators in Nepal by Region, Rural/Urban,and Gender 169


Table 8: Health Profile 170• Population with access to health services• Population with access to safe water• Population with access to sanitation• Population per doctor

• Infant mortality rate• GNP per capita• GNP average annual growth rate• GNP per capita average annual growth rate• Real GDP per capita• Human Development Index (HDI)• Gender-related Development Index (GDI)

• Adult literacy rate• Infant mortality rate• Fertility rate• Underweight children under five• Daily calorie supply

• Pupil-Teacher ratio (primary level)• Children dropping out before grade five• Tertiary, natural and applied sciences enrolment• R&D scientists and technicians• Public expenditure on education (as % of GNP)• Children not in primary school

• Male primary net enrolment ratio• Primary gross enrolment ratio• Female primary gross enrolment ratio• Male primary gross enrolment ratio




• Population per nurse• Daily calorie supply per capita• Maternal mortality rate• Male primary gross enrolment ratio


Table 9: Human Deprivation Profile 171• Population below poverty line• Population without access to health services• Population without access to safe water• Population without access to sanitation• Illiterate adults

Table 10: Gender Disparities Profile 172• Female population• Adult female literacy• Female primary school gross enrolment• Female first, second, and third level gross enrolment ratio• Female life expectancy• Real GDP per capita

Table 11: Child Survival and Development Profile 173• Population under eighteen• Population under five• Infant mortality rate• Under five mortality rate• One-year-old fully immunised against tuberculosis

Table 12: Profile of Military Spending 174• Defence expenditure• Defence expenditure annual % increase• Defence expenditure as % of GNP• Defence expenditure as % of central government expenditure• Defence expenditure per capita• Defence expenditure as % of education and health expenditure

Table 13: Profile of Wealth and Poverty 175• Total GDP• Real GDP per capita (PPP$)• GNP per capita• Income share: ratio of highest 20% of lowest 20%• Population below poverty line• People in poverty, urban, rural (%)• Social security benefits expenditure• Public expenditure on education and health

Table 14: Demographic Profile 176• Population• Population growth rate• Population doubling date• Crude birth rate• Crude death rate• Total fertility rate• Total labour force

Table 15: Profile of Food Security and Natural Resources 177• Food production per capita• Food imports per capita• Cereal imports per capita• Food aid in cereals per capita• Food aid (million $)• Land area• Forest and woodland/arable land as a percentage of land area

• Illiterate female adults• Malnourished children under five• Under five mortality rate• Daily calorie supply• People with disabilities

• Earned income share• Economic activity rate• Administrators and managers• Share of females in parliament• Gender Development Index (GDI)• Gender Empowerment Measure (GEM)

• One-year-old fully immunised against measles• Births attended by trained health personnel• Low birth-weight infants• Child economic activity rate• Child labour

• Armed forces personnel• Number of soldiers (per 1000 population, per 1000

doctors, per 1000 teachers)• Employment in arms production• Military holdings• Aggregate number of heavy weapons

• Gross domestic investment• Gross domestic savings• Industry (as % of GDP)• Tax revenue (as % of GDP)• Exports (as % of GDP)• Debt servicing ratio• Total net official development assistance received• Total external debt

• Male labour force• Female labour force• Annual growth in labour force• Unemployed/underemployed labour• Employed labour force in agriculture, industry,

and services• Annual growth rate of real earnings per employee

• Irrigated land• Deforestation• Annual rate of deforestation• Reforestation• Production of fuel wood and charcoal• Internal renewable water resources per capita• Annual fresh water withdrawals


Note on Statistical Sources for HumanDevelopment Indicators

The human development data presentedin these annex tables have been collectedwith considerable effort from variousinternational and national sources. For themost part, standardised internationalsources have been used, particularly theUN system and the World Bank databank. The UNDP and World Bankoffices made their resources available tous for this report.

Countries in the indicator tables arearranged in descending order accordingto population size. While most data havebeen taken from international sources,national sources have been used whereinternational data have been sparse. Suchdata have to be used with some cautionas their international comparability is stillto be tested.

Several limitations remain regardingcoverage, consistency, and comparabilityof data across time and countries. The dataseries presented here will be refined overtime, as more accurate and comparabledata become available. In particular, policy-makers are invited to note the followingdeficiencies in the currently availablestatistical series and to invest sufficientresources to remedy these shortfalls:

(a) Generally the latest data are notavailable for several indicators. Somestatistical indicators date back ten

years or more. Analysis of the currenteconomic and social situation isgreatly handicapped in the absence ofup-to-date data.

(b) Time series are often missing for eventhe most basic data as populationgrowth, adult literacy, or enrolmentratios. An effort must be made tobuild consistent time series for someof the important indicators.

(c) In certain critical areas, reliable dataare extremely scarce: for instance, foremployment, income distribution,public expenditure on social services,military debt, foreign assistance forhuman priority areas, etc.

(d) Information regarding the activities ofNGOs in social sectors remains fairlysparse.

It is time for policy-makers to make asignificant investment in the collectionand analysis of up-to-date, reliable, andconsistent indicators for social and humandevelopment. If development is to betargeted at the people, a great deal ofeffort must be invested in determining thetrue condition of these people.

It is hoped that the various gaps visiblein this annex will persuade national andinternational agencies to invest moreresources and energy in investigatinghuman development profiles.


1. Basic Human Development Indicators

South Asia DevelopingIndia Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives (weighted Countries

average)

Total estimated population(millions) 2000 1014 138 129 24 19 2.1 0.3 1326 4867

Annual population growthrate (%) 1995-2000 1.7 2.6 1.6 2.7 1.1 3.1 3.7 1.8 1.8

Life expectancy at birth(years)1999 63 65 59 58 74 62 65 62.9 63

Adult literacy rate (%) 1999 56.5 45 40.8 40.4 91.4 42 96.2 53.9 72.9

Female literacy rate (%) 1999 44.5 30 29.3 22.8 88.6 30b 96.2 42 65c

Combined 1st, 2nd and 3rd levelgross enrolment ratio (%) 1999 56 40 37 60 70 33 77 52.6 61

Infant mortality rate(per 1000 live births) 1999 70 84 58 75 17 80 60 69.6 63

GNP per capita (US$) 1999 440 470 370 220 820 510 1200 437.9 1240

GNP average annualgrowth rate (%) 1998-99 6.9 3.6 5 4.6 3.8 5.5d 7.1e 6.3 2.9

GNP per capita average annualgrowth rate(%) 1998-99 4.9 1.2 3.3 2.2 2.7 2.4f 4.4g 4.3 -0.5

Real GDP per capita (PPP$)1999 2248 1834 1483 1237 3279 1341 4423 1997.4 3530

Human development index(HDI) 1999j 0.571 0.498 0.47 0.48 0.735 0.477 0.739 0.554 0.647

Gender-related development index(GDI) 1999k 0.553 0.466 0.459 0.461 0.732 0.444h 0.735 0.535 0.634 i

Notes:a: Population figures for 2000 are taken from UN: World Population Prospects: The 1998 Revision. (Medium variant). Population figures for Pakistan have been

calculated using 1998 Population Census, GOP. The population growth rate has been calculated by using the formula{[(new value/old value)^1/n]-1}*100

b, c, h, i : year 1998d, e, f, g : year 1997-98j: The Human Development Index (HDI) has three components: life expectancy at birth; educational attainment, comprising adult literacy, with two-thirds weight,

and a combined primary, secondary and tertiary enrolment ratio, with one-third weight; and income. Any significant difference in the HDI for the South Asiancountries is due to the change in methodology for calculating the index. Please refer to UNDP’s Human Development Report 2000.

k: The Gender-related Development Index (GDI) adjusts the HDI for gender equality in life expectancy, educational attainment and income.

Source: Rows 1, 2: UN 1999, GOP 1998; Rows 3, 7: UNICEF 2001; Rows 4, 5, 6, 11, 12, 13: UNDP 2001, UNDP 2000; Row 8: World Bank 2001;Rows: 9, 10: World Bank 2000c & World Bank 2001.


2. Trends in Human Development


average)

GNP per capita– 1973 130 130 80 90 230 … … 126 880a

– 1999 440 470 370 220 820 510 1200 437.9 1240

Real GDP per capita(PPP, US$)– 1960 617 820 621 584 1389 … … 648 790– 1999 2248 1834 1483 1237 3279 1341 4423 2123.3 3530

Human development index(HDI)– 1960 0.206 0.183 0.166 0.128 0.475 … … 0.204 …– 1999 0.571 0.498 0.47 0.48 0.735 0.477 0.739 0.554 0.647

Life expectancy at birth– 1960 44 43 40 38 62 37 44 44 46– 1999 63 65 59 58 74 62 65 62.9 63

Gross enrolment ratio forall levels (% age 6-23)– 1980 40 19 30 28 58 7 … 37 46– 1999 56 40 37 60 70 33 77 52.6 61

Adult literacy rate(%)– 1970 34 21 24 13 77 … 91 32 43– 1999 56.5 45 40.8 40.4 91.4 42 96.2 53.9 72.9

Infant mortality rate(per 1000 live births)– 1960 144 139 151 212 90 175 158 144 137– 1999 70 84 58 75 17 80 60 69.6 63

Fertility rate– 1960 6 7 6.7 6 5.4 6 7 6.1 6– 1999 3 4.8 3 4.3 2.1 5.3 5.2 3.2 2.9

Underweight children (% under 5)– 1975 71 47 84 63 58 … … 69 40– 1995-2000 53 26 56 47 34 38 43 49 29

Daily calorie supply(as % of requirement)– 1986 100 97 83 93 110 … 80 98 107– 1997 b 118 110 96 109 101 … 82 114 117

Notes:a: year 1979, b:1995 has been used as base year for required calorie supply

Source: Row 1: World Bank 2001, World Bank 1995b; Rows 2, 3, 5, 6, 9: UNDP 2001, UNDP 2000, UNDP 1994; Row 4: UNICEF 2001, UN 1996;Rows 7, 8: UNICEF 2001, UNICEF 1998; Row 10: UNDP 2000, UNDP 1990.


3. Education Profile


average)

Adult literacy rate (%)– 1970 34 21 24 13 77 … 91a 32 43– 1999 56.5 45 40.8 40.4 91.4 42 96.2 53.9 72.9

Male literacy rate (%)– 1970 47 40 47 22 86 … … 47 55– 1999 67.8 58.9 51.7 58 94.3 58b 96.3 65 80.3c

Female literacy rate (%)– 1970 19 5 9 3 68 … … 17 32– 1999 44.5 30 29.3 22.8 88.6 30d 96.2 42 64.5e

Primary enrolment (%) gross– 1970 73 40 54 26 99 … … 68 76– 1997 100 74f 92g 113 109 73h 131 97 107

Secondary enrolment (%) gross– 1970 26 13 … 10 47 2 … 25 …– 1997 49 26i 19j 42 75 5k 49l 44 59

Combined enrolment for alllevels (%)– 1980 40 19 30 28 58 7 … 37 46– 1999 56 40 37 60 70 33 77 52.6 61

Pupil-teacher ratio (primary level)1997-99* 48.29 48.43 59.31 38 30 41.4 23.43 49 33m

Percentage of children droppingout before grade 5 (1995-99) 48 50 30 56 3 14 2 45.8 27

Tertiary natural and appliedscience enrolment(as % of total tertiary) 1995-97 25 … 25 14 29 … … 22.3 …

R&D scientists and technicians(per 1000 people) 1990-96 0.3 0.1 … … 0.2 … … 0.3 0.4

Public expenditure on education(as % of GNP)– 1960 2.3 1.1 0.6 0.4 3.8 … … 2 2.5– 1995-97 3.2 2.7 2.2 3.2 3.4 4.1 6.4 3.2 3.8

Children not in primary schools(in millions) 1997 27 7 4.5 0.596 0 0.22 0.001 39 …

Notes:a:year 1985; b, c, d, e: year 1998; f: year 1996; g, i, m: year 1995; h, j, k, l: year 1993; * latest available year

Source: Rows 1, 6, 11: UNDP 2001, UNDP 2000, UNDP 1999 & UNDP 1994; Rows 2, 3: UNDP 2001, UNDP 1999, UNICEF 1997;Rows 4, 5: World Bank 2001, World Bank 1998, World Bank 1997b; Row 7: MHHDC 1999; Row 8: UNICEF 2001;Row 9: UNDP 2001, UNDP 2000; Row 10: UNDP 1999; Row 12: MHHDC 2000.


4. Education Indicators in India by State, Rural/Urban, and Gender

Primary net Female primary Male primary Primary gross Female primary Male primaryAdult literacy Female literacy Male literacy enrolment ratio net enrolment net enrolment enrolment gross enrolment gross enrolmentrate (%) 1997 rate (%) 1997 rate (%) 1997 (%) 1997 ratio (%) 1997 ratio (%) 1997 ratio (%) 1997 ratio (%) 1997 ratio (%) 1997

All India 57.7 43.9 70.5 60.3 48.8 71 90.3 81.5 98.5

Rural areas 49.4 34 64 60.7 47.7 72.8 90.8 79.6 101.1

Urban areas 80.4 72.1 87.7 59 52 65.5 89 86.8 91

Andhra Pradesh 46.6 35 58 52.3 46.4 57.9 89.6 86.8 92.3

Arunachal Pradesh 52.9 39.9 64 69.7 52.2 89.6 97.2 82.1 114.5

Assam 72.1 60 83 85.4 74.9 95.4 109.1 104.3 113.8

Bihar 44.3 27 60 50.2 28.2 70.1 76 59.5 90.9

Goa 83.6 74.9 92 68 59.4 78.1 86.1 76.8 97.1

Gujarat 63.4 49 77 90.3 80.8 97.6 117.6 114.5 119.9

Haryana 57.1 41 71 56.9 56 57.6 83.9 84.9 83.1

Himachal Pradesh 73.7 63 84 74.1 66.4 83 90.1 82.7 98.6

Jammu & Kashmir 50.6 35 65 35.9 23.7 49.4 67.2 53.4 82.7

Karnataka 53.2 43 63 89 77.3 100.4 113.2 120.7 105.5

Kerala 91.4 88 95 69.6 67.4 71.7 90.1 88.8 91.3

Madhya Pradesh 49.6 32 66 79.2 60.5 96.8 102.4 89.4 114.5

Maharashtra 68.9 56 81 80.1 75.1 84.9 112.9 110 115.7

Manipur 71.4 57.9 84.1 77.1 64.1 92.3 85.9 74.1 99.7

Meghalaya 68.2 64 72.1 52.7 49.4 56.5 93.4 86.1 101.9

Mizoram 94.9 93.9 95.8 88.2 77.6 99.1 113.6 104.6 123

Nagaland 82.5 71.9 91.9 44.4 39.9 49.7 94.3 86.3 103.6

Orissa 47.2 32 62 67.2 49 84.9 90.5 76.1 104.5

Punjab 60.4 53 67 59.3 59.3 59.3 81.6 83.1 80.4

Rajasthan 48.9 27 69 56.4 31.8 78.5 97 81 111.3

Sikkim 76.2 66.2 85 64.3 58.2 70.7 113.3 110 116.7

Tamil Nadu 65.6 54 77 84.8 82.1 87.3 108.6 107.3 109.8

Tripura 71.2 65 77 81.4 65.2 99.9 88.4 75.3 103.4

Uttar Pradesh 49.1 32 64 30.8 18.4 41.8 62.3 49 74.1

West Bengal 69.6 58 80 46.4 40.2 52.3 92.2 85.6 98.6

A & N Islands 96.6 93 100 71.9 61.4 84.4 86.9 76.2 99.6

Chandigarh (UT) 80.2 67.8 89.9 52.1 47.7 56.6 79.5 73.2 85.9

D & N Haveli 47.7 30.2 64.3 71 49.3 92.7 73.2 111 96.2

Daman & Diu 81.5 67.5 95.1 79.6 70 90.5 99.1 88.8 99.1

Delhi 81.8 72 90 68.4 63.9 73.2 89.1 81.6 97.2

Lakshadweep (UT) 95.1 90 100 91.7 82.3 101.1 104.5 96.3 112.8

Pondicherry (UT) 86.9 81.8 92 84.9 72.8 99.1 93.5 83 105.8

Notes:— UT is Union Territory. — A person is literate if he or she can read and write with understanding in any language. — Official primary school age is 5/6 years to9/10 years in India.

Source: GOI 1999b.


5. Education Indicators in Pakistan by Province, Rural/Urban, and Gender


All Pakistan 45 32.6 56.5 49.2 40.2 57.6 81.3 66.6 95

Rural areas 34.4 20.8 47.4 … … … … … …

Urban areas 64.7 55.6 72.6 … … … … … …

NWFP 37.3 21.1 52.8 56.1 39.2 71.7 66.5 50 81.7

Punjab 47.4 35.3 58.7 50.4 45.7 54.8 54.4 47.9 60.5

Sindh 46.7 35.4 56.6 42.3 30.7 52.9 47.5 34.5 59.3

Balochistan 26.6 15 36.5 41.6 31.3 50.1 52.8 40.8 62.7

Islamabad 69 58.2 77.9 89.2 85.2 93.1 100.4 95.5 105.2

Note:— Official primary school age is 5-9 years.

Source: GOP 1999a.


6. Education Indicators in Bangladesh by District, Rural/Urban, and Gender


All Bangladesh 55.9 48.1 63.1 81.4 82.9 80.0 96.5 94.5 98.4

Rural areas 51.7 44.9 58.3 81.1 82.7 79.6 86.5 94.5 98.4

Urban areas 75.5 64.0 84.3 82.9 84.0 81.8 96.5 94.5 98.4

Dhaka 58.8 49.2 67.6 79.9 81.8 78.1 97.2 95.6 98.7

Rajshahi 47.3 36.8 56.9 80.2 82.7 77.7 96.5 93.5 99.4

Khulna 55.1 46.2 63.4 85.8 88.6 83.1 100.0 98.2 101.8

Chittagong 57.9 53.4 62.0 81.4 80.9 81.9 95.3 92.2 98.3

Sylhet 49.6 45.6 53.2 78.6 79.8 77.6 94.8 95.1 94.5

Barisal 75.2 74.9 75.5 88.4 89.1 87.7 93.7 95.4 92.1

Notes:— Definition of literacy used is reading, writing and simple numeracy skills.— Official primary school age is 6-10 years.

Source: GOB 1999c.


7. Education Indicators in Nepal by Region, Rural/Urban, and Gender


All Nepal 44.8 27.7 62.5 69.6 59.9 78.9 122.1 103.7 139.6

Eastern Region 44.6 26.9 62.7 70.7 62.9 78.3 120.3 106.5 133.8

Central 39.1 21.5 56.2 68.8 56.9 79.9 116.9 94.5 138

Western 55.7 39.7 74.7 76.8 72.9 80.5 141.9 135.5 147.9

Mid-Western 33.9 14.4 53.1 66.3 51.9 81.1 115.1 88.9 140.7

Far Western 35.1 14.9 56.8 57.9 45.3 70.2 111.8 81.6 141.1

Mountain 38. 19.7 55.6 79 64.9 92.8 141.6 108.9 173.6

Hill 49.1 30.7 69.7 81.2 73.8 88.4 148.7 133.1 164.1

Terai 36.6 20.6 51.8 57.4 45.3 69 94.2 73.6 113.7

Notes:— The definition of literacy used is self-nomination (by sampling).— Official primary school age is 6-10 years.

Source: HMG Nepal 1999a.


8. Health Profile


average)

Population with access to healthservices (%) 1995 85 55 45 … 93 65 75 78 80

Population with access tosafe water (%)– 1990-96 81 60 84 44 46 58 96 82 71– 2000 88 88 97 81 83 … … 88.5 79

Population with access tosanitation (%)– 1990-96 16 30 35 6 52 70 66 22 29– 2000 31 61 53 27 83 … … 36.9 52

Population per doctor– 1984 2520 2910 6730 32710 5520 23310 20300 3720 4590– 1992-95 2083 1923 5555 20000 4348 5000 5263 2273 1282

Population per nurse– 1980 4674 5870 14750 7783 1262 2990a 600b 4162 …– 1993 3323 3330 11549 2257 1745 6667 … 4091 4715

Daily calorie supply per capita1997 2496 2476 2085 2366 2302 … 2485 2379 2663

Maternal mortality rate(per 100,000 live births) 1990-99 410 340c 440 540d 60 1600e 202f 405 …

Women using contraception(% age 15 - 49)– 1970 12 4 22 1 8 … … 12 18– 1990-99 41 17 49 30 66 19 17 39 …

Public expenditure on health(as % of GDP)– 1960 0.5 0.3 … 0.2 2 … 2.4 0.5 0.9– 1990-98 0.6 0.9 1.6 1.3 1.4 4 5.3 0.8 1.9

Pregnant women aged 15-49with anaemia (%) 1975-91 88 37 53 65 39 30 … 84 …

Notes:a, b: year 1984c, d: year 1990-98; e: year 1993; f: year 1995.

Source: Row 1: UNDP 1998; Rows 2, 3: World Bank 2001, UNDP 1998; Row 4: UNDP 2001, UNDP 1992; Row 5: MHHDC 1999; Row 6: UNDP 2000;Row 7: World Bank 2000c, World Bank 2001, MHHDC 1999; Row 8: UNDP 2000, MHHDC 1998; Row 9: World Bank 2000c; Row 10: UNDP 1999, UNDP 2000.


9. Human Deprivation Profile


average)

Population below poverty line (%)– $1 a day (1993 PPP U$)

1989-1998 44.2 31 29.1 37.7 6.6 … … 40.7 …– national poverty line 1984-1999 35 34 35.6 42 25a … … 32 …

Population without access tohealth services 1995– number (millions) 143 63 68 … 1.3b 0.6 0.1c 276T 910T– as a % of total population 15 45 55 … 7d 35 25c 22 20

Population without access tosafe water 2000– number (millions) 121.7 16.6 3.9 4.6 3.2 0.8f 0.01g 1067T– as a % of total population 12 12 3 19 17 42b 4i 11 21

Population without access tosanitation 2000– number (millions) 699.7 53.8 60.6 17.5 3.2 0.6j 0.09k 835T 2439T– as a % of total population 69 39 47 73 17 30l 34m 63 48

Illiterate adults 1999– number (millions) 432 74 75 14 1.7 1.12 0.01 598T 1372T– as a % of total adult population 43.5 5.5 59.2 59.6 8.6 56n 3.8 46 27p

Illiterate female adults 1999– number (millions) 266 45 43 8.7 1.1 0.7 0.01 365T 881T– as a % of total adult

female population 55.5 70 70.7 77.2 11.6 70q 3.8 58 35r

Malnourished childrenunder 5 1990-98*– number (millions) 59 9 8 2 0.54 0.1 0.002 79T 167T– as a % of total population 53 38 56 47 34 38 43 51.1 31

Under-five mortality rate(per 1000 live births) 1999 98 112 89 104 19 107 83 97.6 90

Daily calorie supply 1997– quantity 2496 2476 2085 2366 2302 … 2485 2447.2 2663– as a % of total requirements 118 110 96 109 101 … 82 114 117

People with disabilities 1992– number (millions) 1.8 6.5 0.9 0.6 0.07 … … 9.92T 110T– as a % of total population 0.2 4.9 0.8 3 0.4 … … 0.9 2.6

Notes:a: year 1987-97, b, d: year 1985-95, c, e: year 1991; f, g, h, i, j, k, l & m: year 1990-96; n, p, q, r: year 1998;* latest available year

Source: Row 1: UNDP 2001, UNDP 2000; Row 2: MHHDC 1998; Rows 3, 4: World Bank 2000c, World Bank 2001; Rows 7, 9: UNDP 2000,Row 8: UNDP 2001; Rows 5, 6, 10: UNDP 2001, UNDP 2000, UNDP 1999, UNICEF 2001.


10. Gender Disparities Profile


average)

Female population (2000)– number (millions) 491 66 63 12 9.5 1.05 0.14 642.7 2395– as a % of male 93.9 91.7 95.5 100 102.2 98.1 93.3 94.1 96.9

Adult female literacy(as % of male)– 1970 41 35 35 12 80 … … 40 …– 1999 66 51 57 39 94 52a 100b 63 81c

Female primary school grossenrolment (as % of male)– 1970 64 37 48 20 92 6 107 60 79– 1995-99* 82.8 69.6 96.9 74.2 98.2 75.6 97.6 83 89.8

Female 1st, 2nd and 3rd levelgross enrolment ratio(as % of male) 1997 75 50 75 71 103 71 101 74 87

Female life expectancy(as % of male)– 1970 97 99 97 97 103 104 95 97 103– 1999 102 103 100 98 107 103 96 102 105

Real GDP per capita (PPP$)(female as % of male) 1999 37 29.9 57.6 52.8 50.9 50.8d 59 39 50e

Earned income share(female as % of male) 1995 34 26 30 50 55 48 55 33 48

Economic activity rate(age 15+) (female as % of male)– 1970 43 11 6 52 37 52 35 37 53– 1999 50 40.5 76.2 67 55 65 79 52 66.1f

Administration and managers(% female) 1992-97 2.3 4.3 4.9 … 17.6 … 14 3 10

Share of females inparliament (%) 1999 8.7 2.6 12.4 7.9 4.9 2 6.3 7.3 10

Gender Development Index(GDI) 1999 0.553 0.466 0.459 0.461 0.732 0.44g 0.735 0.535 0.634h

Gender EmpowermentMeasure (GEM) 1997 0.24 0.176 0.304 … 0.321 … 0.342 0.236 …

Notes:* latest available year.a: year 1997; b, c, d, e, f, g, h: year 1998

Source: Row 1: UN 1999; Row 2: UNESCO 1994, UNDP 2000; Row 3: UNICEF 2001, World Bank 1997b; Rows 4, 6, 11 & 12: UNDP 1999, UNDP 2000, UNDP2001; Row 5: UNICEF 2001; UN 1994; Row 7: UNDP 1998; Row 8: UNDP 2001, MHHDC 1999; Row 9: UNDP 1999, UNDP 1998; Row 10: IPU 1999, GOP1999b, GOI 1999a, GOB 1999a, GOS 1999, HMG Nepal 1999b.


11. Child Survival and Development Profile


average)

Population under 18 (1999)– number (millions) 398 68a 56 11 6.2 1.01 0.14 427.3 1857.5– as a % of total population 40.4 51.9 44.1 47 32.6 49 48.3 42 38

Population under 5 (1999)– number (millions) 115 19 15 3.4 1.6 0.34 0.04 154.4 538– as a % of total population 11.8 14.5 12 14.8 8.5 16.5 14.3 12.1 11

Infant mortality rate(per 1000 live births)– 1960 144 139 151 199 83 175 180 144 138– 1999 70 84 58 75 17 80 60 69.6 63

Under 5 mortality rate(per 1000 live births)– 1960 236 226 247 297 133 300 300 235 216– 1999 98 112 89 104 19 107 83 97.6 90

One year olds fully immunisedagainst tuberculosis (%)– 1980 14 9 1 43 63 9 8 13 …– 1995-98 79 66 91 86 90 94 99 79.2 81

One year olds fully immunisedagainst measles (%)– 1980 1 3 2 2 0 18 30 1 …– 1997-99 55 54 66 73 95 77 97 57 70

Births attended by trainedhealth personnel (%) 1995-2000 34 19 13 9 94 15 90 30.9 52

Low birth weight infants (%)1990-97 33 25 50 … 25 … 13 33 18

Child economic activity rate(% age 10-14) 1999 13 16 29 43 2 55b 6c 15 16

Child labour (millions) 1994 100 19 15 … … … … 134 …

Notes:a: includes age groups 0-19; b and c: year 1995

Source: Rows 1, 2: UNICEF 2001, GOP 1998; Rows 3, 4, 5, 6, 7: UNICEF 2001, UNICEF 1984; Row 8: UNDP 1999, UNDP 2000; Row 9: World Bank 2000b,MHHDC 1998; Row 10: UNICEF 1995.


12. Profile of Military Spending


average)

Defence expenditure(US$ millions, 1993 prices)– 1985 7207 2088 308 22 214 … … 9839T 189727– 1998 10600 2810 450 40 730 … … 14630T 164700

Defence expenditure annual% increase (1985-98) 3 2.3 3 4.7 9.9 … … 3.1 -1.1

Defence expenditure(as a % of GNP)– 1985 2.5 5.1 1.3 0.7 2.6 … … 3 7.2– 1998 2.5 4.6 1 0.8 4.8 … … 2.6 2.9

Defence expenditure(as a % of central governmentexpenditure)– 1980 19.8 30.6 9.4 6.7 1.7 … … 21.3 …– 1998 17.1 20.7 … 0.7 18.6 … … 15.5 …

Defence expenditure per capita(US$, 1993 prices)– 1985 9.4 22 3.1 1.3 14 … … 9.9 52– 1998 10.8 21.5 3.6 1.7 39.2 … … 11.4 33

Defence expenditure (as a % ofeducation & health expenditure)– 1960 68 393 … 67 17 … … 113 143– 1995 57 181 46 22 100 … … 71 …

Armed forces personnel(no. in thousands)– 1985 1260 484 91 25 22 … … 1882 16027– 1998 1175 587 121 46 113 … … 2042 14200– % increase (1985-97) -7.2 17.5 24.8 45.7 80.5 … … 7.8 -12.9

Number of soldiers– per 1000 population (1998) 1.18 4.5 0.98 2 6.1 … … 1.9 2.8– per 1000 doctors (1990) 4000 9000 6000 35000 25000 … … 5594 18500

Employment in arms 1998production (000’s) 250 50 … … … … … 300 3810

Military holdingsa 1998index (1985=100) 178 151 193 40 889 … … 170 106

Aggregate number ofheavy weapons 1998 10510 5310 390 10 240 … … 16460 210200

Notes:a: military holdings include combat aircrafts, artillery, ships & tanks that a country possesses. The index is a calculation based on the aggregate number of heavyweapons.

Source: Rows 1, 2, 7, 10: BICC 2000, BICC 1997; Row 3: BICC 2000, BICC 1997, UNDP 2000; Row 4: BICC 2000; BICC 1997; UNDP 1999, World Bank 1995a;Row 5: BICC 2000, UN 1999, GOP 1998; Row 6: MHHDC 1999; Row 8: BICC 2000, UN 1999, GOP 1998; Rows 9, 11: BICC 2000.


13. Profile of Wealth and Poverty


average)

Total GDP (US$ billions)1999 447.3 58.2 46 5 16 0.4 0.4 573T 5,827T

Real GDP per capita(PPP$) 1999 2248 1834 1483 1237 3279 1341 4423 2123.3 3530

GNP per capital (US$) 1999 440 470 370 220 820 510 1200 438 1240

Income share: ratio of highest20% to lowest 20% (1987-98*) 5.7 4.3 4.9 5.9 5.4 … … 5.5 …

Population belowpoverty line (%)– $1 a day (1993 PPP US$)

1989-1998 44.2 31 29.1 37.7 6.6 … … 41 …– national poverty line 1984-1999 35 34 35.6 42 25a … … 321 …

People in poverty (%) 1990– urban 38 20 56 19 15 … … 37 …– rural 49 31 51 43 36 … … 47 …

Social security benefits expenditure(as % of GDP) 1993 0.3 0.2 … … 2.5 … … 0.4 …

Public expenditure on educationand health (as % of GNP) 1995 4.2 3.6 3.7 4.3 4.5 … 13.3 4.1 …

Gross domestic investment(as % of GDP) 1999 23 15 22 20 27 47.3b … 22 23

Gross domestic savings(as % of GDP) 1999 20 10 17 13 20 37.9 … 18.6 25

Industry (as % of GDP) 1998 24.7 25 27.9 22 27.5 36.5 … 25 34.1

Tax revenue (as % of GDP)1998 8.6 12.6 8.4c 9 14.5 7.8 21 9 …

Exports (as % of GDP) 1999 12 15 13 23 35 31 … 13 28

Debt service ratio(debt service as % of exports ofgoods and services) 1999 15 30.5 10.1 7.9 7.9 4.8 3.9 16 22.3

Total net official developmentassistance received(US$, millions) 1999– quantity 1484.4 732 1203.1 343.7 251.4 66.6 30.7 4112T 33026T– as % of GDP 0.3 1.3 2.6 6.9 1.6 15.1 … 0.8 0.6

Total external debt 1999(US$, billions) 94 34 18 2.6 8.5 … … 157T 2572T

Notes:* data refer to most recent year availablea: year 1987-1997b: year 1998c: year 1997

Source: Rows 1, 2, 4, 5, 14 & 15: UNDP 2001; Row 11: UNDP 2000; Row 3: World Bank 1999a; Rows 9, 10, 13: World Bank 2001, UNDP 2000; Row 6: UNDP1996; Row 7: MHHDC 1999; Row 8: WHO 1999; UNDP 1999, World Bank 1997b; Row 12: UNDP 1999, GOB 1999b; Row 16: World Bank 2001.


14. Demographic Profile


average)

Population (in million)– 1960 442 50 51 9 10 1 0.1 563T 2,070T– 2000 1014 138 129 24 19 2.1 0.3 1,326T 4,867T

Population growth rate (annual) (%)– 1960-70 2.3 2.8 2.6 2 2.4 1.8 2 2.4 2.5– 1970-80 2.2 2.6 2.8 2.6 1.7 2 2.7 2.3 2.2– 1980-90 2.1 3.6 2.1 2.6 1.6 2.2 3.2 2.3 2.1– 1990-95 1.9 2.7 2 2 1.1 3.7 2.6 1.9 1.8– 1995-00 1.7 2.6 1.6 2.7 1.1 3.1 3.7 1.8 1.6

Population doubling date(at current growth rate) 1995 2036 2022 2039 2021 2058 2018 2014 2034 2039

Crude birth rate (per 1000 live births)– 1960 43 49 47 44 36 42 41 44 42– 1999 25 35 28 34 18 37 35 26.4 25– % decline (1960-99) 42 28.6 40 23 50 11.9 15 40.9 40

Crude death rate(per 1000 live births)– 1960 21 23 22 26 9 26 21 21 20– 1999 9 7 9 10 6 9 7 8.8 9– % decline (1960-99) 57 69.5 59 61.5 33 65.3 67 57 55

Total fertility rate– 1960 6 7 6.7 6 5.4 6 7 6.1 6– 1999 3 4.8 3 4.3 2.1 5.3 5.2 3.2 2.9– % decline (1960-99) 50 31.4 55.2 28.3 61.1 11.6 25.7 47.5 51.6

Total labour force 1999(in millions) 441 50 67 11 8 … … 577T 2,460T

Male labour force 1998(in millions) 293 35 37 6 5 … … 376T 1447T

Female labour force 1998(in millions) 138 14 27 5 3 … … 187T 969T

Percentage annual growthin labour force– 1980-99 2 2.8 2.6 2.3 2.2 … … 2.1 2– 1999-2010 1.9 3.2 2.3 2.5 1.7 … … 2.1 1.6

Unemployed/Underemployedlabour (as a % of total) 1993 22 13 12 43 16 6 1 21 …

Employed labour force (%) 1997– agriculture 60.1 45.5 60.1 93.8 46.3 94 20.2 59.1 …– industry 18.1 21.5 21.8 0 22.9 0.5 32.7 18.5 …– services 21.8 33 18.1 6.4 30.8 5.5 48.1 22.4 …

Real earnings per employeeannual growth rate (%) 1980-92 2.5 … -0.7 … 1.4 … … 2.2 …

Source: Rows 1, 2: UN 1999, UN 1994; Row 3: UN 1999; Rows 4, 5, 6: UNICEF 2001, UNICEF 1997; Rows 7, 10: World Bank 2001; Rows 8, 9: World Bank 2000;Row 12: ILO 1998; Rows 11, 13: MHHDC 1998.


15. Profile of Food Security and Natural Resources


average)

Food production per capita1998 (1989-91=100) 120 142 112 118 114 107 115 121.4 132a

Food imports per capita 193(1980=100) 46 114 86 137 553 … … 68 …

Cereal imports per capita(1,000 tons) 1994 (1980=100) 2 195 33 79 87 … … 68 70

Food aid in cereals per capita(1,000 tons) 1994-95 (1980=100) 46 23 91 33 126 … … 57 63

Food aid (US$ million) 1992 99 190 240 6 63 3 1 602T 3,130T

Land area (1000 ha) 1997 297319 77088 13017 14300 6463 4700 30 412,917T 7,494,675T

Percentage of land areaunder 1997– forest and woodlandb 22 2 8 35 28 59 3 19 26– cropland 57 28 63 21 29 3 10 54 11

Irrigated land (as % of cropland)1997 34 81 45 38 32 25 … 40 20

Deforestation (1000 ha per year)1980-89 1500 9 8 84 58 1 … 1106 866

Annual rate of deforestation(%) 1990-95 0 2.9 0.9 1.1 1.1 0.3 … 1 …

Reforestation (1000 ha per year)1980-89 138 7 17 4 13 1 … 103 797

Production of fuel wood andcharcoal (1000m3 per year)– 1980 201956 16683 22941 13732 7305 1027 … 263,644T 1,253,900T– 1996 279350 276470 32020 20718 9780 1381 … 370,889T 1,669,840T

Internal renewable waterresources per capital(1000m3 per year) 1998 1896 1678 10940 7338 2341 49557 … 2937 6055

Annual fresh waterwithdrawals c

– as % of water resources 21d 63 2 2 15e 0 … … 63– per capita (m3) 612f 1269 217 154 503g 13 … 538 496

Note:a: year 1997b: Data refers to the year 1995; c: Data refer to any year between 1987-96 unless otherwise stated.d & f: year 1975; e & g: year 1970

Source: Rows 1, 13: UNDP 1999, UNDP 2000; Rows 2, 3, 4,: World Bank 1997b; Rows 5: World Bank 1995a; Rows 6, 8: FAO 1998; Row 7: FAO 1998, UN 1997.Rows 9, 11: UN 1990/91; Rows 10, 14: WRI 1998/99; Row 12: FAO 1996.


Aggregate net long term resource flows are thetotal resource flows with original maturityof loans greater than one year.

Aggregate net short term resource flows arethe total resource flows of originalmaturity of loans of less than one year.

Balance of payment account is a double entryrecord of all real and financial transactionsbetween one country and the rest of theworld. It shows all flows of goods andservices into and out of an economy andall transfers of real resources or financialclaims provided to or by the rest of theworld without a quid pro quo.

Current account balance is the sum of netexports of goods and services, income,and current transfers.

Gross fixed capital formation refers to totaloutlays on additions to the fixed assets ofa country including net changes in thelevel of inventories.

Institutional Investor Credit Ratingmeasures the chances of a country’sdefault. The ranking ranges from 0 to100. The higher the rating, the lesser thechances of default for that country.

Portfolio equity flows refer to purchasesof shares by foreign investors ondomestic stock markets.

Selected definitions

Net financial flows include net inflows ofinvestment, net portfolio equity flows, netportfolio debt flows and bank and trade-related lending.

Merchandise exports show the f.o.b(free on board) value, in US dollars, ofgoods provided to the rest of the world.

Merchandise imports show the c.i.f(cost plus insurance and freight) value inUS dollars of goods purchased from therest of the world.

Real per GDP capita is the grossdomestic product (GDP) per capita of acountry converted into US dollars by theAtlas Method as used by the World Bank.GDP measured at purchasing powerparity (PPP) is GDP converted into USdollars by the PPP exchange rate.

Real effective exchange rate is the exchangerate of a country in terms of the exchangerate of other countries with tradingvolumes used as weights and with anadjustment made for inflation.

Trade balance refers to the excess ofmerchandise trade exports overmerchandise imports.

Trade to GDP ratio is the trade balanceas a percentage of the gross domesticproduct.

Key to Indicators 179

Indicator Indicator Originaltables source

A, B, CAgriculture (as a % of GDP 4g UNDP

as % of total exports 1g WBArmed forces personnel 12 BICCBank and trade related

lending 2g WB; UNDPBangladesh education

indicators 6 GOBBirths attended by trained

health personnel 11 UNICEFCable connections per 1000

people 3g ITUCalorie supply (daily) 2,8,9 UNDP

as % of total requirement 2 UNDPper capita 8 UNDP

Cereal imports per capita 15 WBChild economic activity rate 11 UNDP; WBChild labour, total 11 UNESCOCo2 emissions, total 5g WB

share of world total 5g WBper capita 5g WB

Computers, personal, per1000 people 3g ITU; UNDP

Crude birth rate 14 UNICEFCrude death rate 14 UNICEF

DDaily newspapers 3g MHHDCDebt, total external 13,2g WB

(PV as % of GNP) 2g WBDebt servicing

% of GNP 2g WB% of exports of goods

and services 2g WBdebt service ratio 13 UNDP

Defence expenditure, total 12 BICCannual % increase 12 BICCas % of GNP 12 BICC; UNDPas % of govt. exp. 12 BICC; UNDPper capita 12 BICC; UN; GOPas % of education &health expenditure 12 MHHDC

Deforestation, total 15 UN% annual rate 15,5g WRI; WB; UNDP

Drop out rate of children(before grade 5) 3 UNICEF

EEarned income share 10 UNDPEconomic activity rate 10 UNDP; MHHDCEmployment in arms

production 12 BICCEnrolment, primary level 3 WB

female 3 UNDP; UNICEFEnrolment, secondary level 3 WB

2nd & 3rd level 1,3 UNDPEnrolment ratios, gross 2 UNDPExports, total 1g WB

% of GDP 1g WB

KEY TO INDICATORS


F, GFax machines per 1000

people 3g ITU; UNDPFDI flows 2g WBFemale administrators &

managers 10 UNDPFertility rate, total 14 UNICEFFood aid, total 15 WB

cereals per capita 15 WBFood exports, % of total

exports 1g WBFood imports per

capita 15 WBFood production per capita 15 UNDPFresh water withdrawals

as % of water resources 5g UNDPper capita 5g UNDPWater resources, internalrenewable 5g UNDP

Fuel wood & charcoalproduction, total 15 FAO

Gender EmpowermentMeasure 10 UNDP

Gender-related DevelopmentIndex 1,10 UNDP

GDP, total 13 WBGDP, real per capita 1,2,13 UNDPGNP, growth rate 1 WBGNP per capita 1,2,13,4g WBGNP per capita growth rate 1,4g WBGross domestic investment 13 WB; UNDPGross domestic savings 13 WB; UNDP

H, I, JHealth expenditure, public

(as % of GDP) 8 WBHealth services, % with

access 8 UNDP% without access 9 UNDP

Human Development Index 1,2 UNDPIlliterate adults, total 9 UNDP

female 9 UNDPImmunisation against

measles 11 UNICEFtuberculosis 11 UNICEF

Imports, total 1g WB% of GDP 1g WB

Income poverty, 1 $ a day 9,13 UNDPnational poverty line 9,13 UNDP

Income share: ratio of top20% to bottom 20% 13 WB

India education indicators 4 GOIIndustry (as % of GDP) 13,4g UNDPInfant mortality rate 1,2 UNICEFInflation, growth rate 4g UNDPInternet hosts per 10,000

people 3g WBusers 3g ITU



K, LLabour force, total 14 WB

female 14 WBmale 14 WB% annual growth 14 WB% unemployed/underemployed 14 MHHDC% employed 14 WB% employed, agriculture 4g ILO% employed, industry 4g ILO% employed, services 4g ILO

Land area 15 FAOirrigated land 15 FAO

Life expectancy at birthtotal 1,2 UNICEFfemale 10 UNICEF

Literacy rate, total 1,2,3 UNDPfemale 1,10 UNDPmale 3 UNDP

M, N, OMalnourished children

under five 9 UNDPManufactures, % of total exports 1g WBMaternal mortality rate 8 WBMean tariff rates

all products 1g WBprimary products 1g WBmanufactured goods 1g WB

Military holdings index 12 BICCMobile phone subscribers

per 1000 people 3g ITUNepal education indicators 7 HMGNNumber of soldiers 12 BICC; UNDPODA received, total 13,2g UNDP; WB

as % of GNP 13 UNDP


P, Q, RPakistan education indicators 5 GOPPaper, printing and writing

consumed 5g UNDPPatent applications filed

resident 3g WBnon-resident 3g WB

Portfolio investment flows 2g UNDPPublic payphones per 100,000

people 3g UNDPPupil-teacher ratio 3 MHHDC

SSafe water, % with access 8 UNDP; WB

% without access 9 WBSanitation, % with access 8 UNDP; WB

% without access 9 WBServices (% of GDP) 4g UNDP

T, U, VTelephone mainlines,

per 1000 people 3g ITU; MHHDC;UNDP

Televisions, per 1000 people 3g ITUTertiary, natural & applied

sciences enrolment 3 UNDPTourism, international

departures 3g UNDPUnderweight children

(under 5) 2 UNDP

W, X, Y, ZWater withdrawals, fresh 15 WRIWater resources, per capita 15 UNDP

Note: ‘g’ is added to table numbers that appear in Profile of Globalisation in South Asia.

BICC Bonn International Centre for ConversionFAO Food and Agriculture OrganizationGOB Government of BangladeshGOI Government of IndiaGOP Government of PakistanGOS Government of Sri LankaHMGN His Majesty’s Government of NepalILO International Labour OfficeIPU Inter-Parliamentary UnionITU International Telecommunication Union

MHHDC Mahbub ul Haq Human Development CentreUN United NationsUNDP United Nations Development ProgrammeUNESCO United Nations Educational Scientific and

Cultural OrganizationUNICEF United Nations Children’s FundWB World BankWHO World Health OrganizationWRI World Resources Institute

Key to source abbreviations

human develo pment in south asia 2 0 0 1...g-8 group of industrialised countries gats general...

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