south asia development report04 final

South AsiaDevelopment and Cooperation

Report 2004

RISResearch and Information System for theNon-Aligned and Other Developing Countries


Report 2004


Report 2004

Research and Information System for theNon-Aligned and Other Developing Countries

RIS

Copyright © 2004 by RIS

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The South Asia Development and Cooperation Report 2004 has been prepared by a RIS research teamled by Dr. Nagesh Kumar, Director-General, RIS. The core team comprised Dr. K.J. Joseph, Visiting SeniorFellow; Dr. Ram Upendra Das and Dr. Sachin Chaturvedi, Fellows; Dr. Mirza Allim Baig, Prabir De andDr. Saon Ray, Research Associates, RIS. Inputs have also been provided by Dr. Ramgopal Agarwala, SeniorAdvisor, RIS. Sunayana Mehra provided research assistance to the Report Team.

The Report Team has received valuable encouragement and inputs from the National Focal Points of theSAARC Network of Researchers on Global Financial and Economic Issues. A draft of the Report wasdiscussed at the Sixth Meeting of the Network of Researchers held in Islamabad on 8th December, 2003, andbenefited from the feedback.

The production of the Report was managed by Tish Malhotra with DTP assistance from Pradeep Kumar.

Foreword by Shri K.C. Pant, Deputy Chairman, Planning Commission and Chairman, RIS .......................... ix

Preface ............................................................................................................................................................... xi

Executive Summary .......................................................................................................................................... 1

Chapter 1: Global Economic Trends and South Asia .............................................................................. 71.1 Introduction ........................................................................................................................ 71.2. Global Economic Outlook .................................................................................................. 71.3. World Trading System: Post-Cancun Scenario .................................................................. 9

Chapter 2: Reforms and Global Economic Integration of South Asia ................................................. 132.1 Introduction ...................................................................................................................... 132.2 Policy Reforms: An Overview.......................................................................................... 132.3 Reforms and Global Economic Integration ...................................................................... 192.4 Concluding Remarks ........................................................................................................ 20

Chapter 3: Macroeconomic Performance and Outlook of South Asia: ............................................... 21Growth, Structural Transformation and Stabilization3.1 Introduction ...................................................................................................................... 213.2 Growth Performance over the Past Decade and Outlook ................................................. 213.3 Growth Outlook Across Countries ................................................................................... 223.4 Structural Transformation: Service Sector Emerges as the Key Driver of Growth .......... 243.5 Performance in terms of Economic Stabilization .............................................................. 263.6 Concluding Remarks ........................................................................................................ 28

Chapter 4: Trade Performance and Competitiveness ........................................................................... 294.1 Introduction ...................................................................................................................... 294.2 Trends and Patterns in Trade Performance ....................................................................... 294.3 South Asia’s Export Performance in a Comparative Global Perspective ......................... 324.4 Challenges for Improving Export Competitiveness .......................................................... 34

Chapter 5: Foreign Direct Investment and Global Production Networks ........................................... 395.1. Introduction ...................................................................................................................... 395.2. FDI Flows in South Asia .................................................................................................. 395.3 Explanations for Small Share of South Asia in FDI Inflows ............................................ 405.4. Sectoral Patterns in FDI Inflows: Services in the Lead .................................................... 425.5. FDI and Global Production Network in South Asia ......................................................... 435.6. Concluding Remarks ........................................................................................................ 43

Contents

Chapter 6: Regional Economic Integration in South Asia: Lessons from Different Approaches ..... 476.1. Introduction ...................................................................................................................... 476.2. Regional Economic Integration under SAARC ............................................................... 476.3. Subregional Initiatives ..................................................................................................... 506.4. Bilateral Economic Cooperation in South Asia ................................................................ 526.5. Monetary Union in South Asia: Prospects and the Way Forward .................................... 576.6. Lessons from South Asian Regional Cooperation Initiatives ........................................... 59

Chapter 7: Transport Infrastructure: Present Status and Potentials for Cooperation ...................... 637.1. Introduction ...................................................................................................................... 637.2. Transport Infrastructure Profile of South Asia ................................................................. 647.3. Potential for Infrastructure Cooperation among South Asian Countries .......................... 677.4. Policy Perspective for Cooperation in Transport Infrastructure ....................................... 73

Chapter 8: Biotechnology in South Asia: Issues, Concerns and Opportunities for Cooperation ..... 778.1 Introduction ...................................................................................................................... 778.2 Trends and Status of Biotechnology ................................................................................. 778.3 International Institutions in the Region ............................................................................ 868.4 Biodiversity Conservation and CBD ................................................................................ 878.5 Biosafety Management and Regulatory Issues ................................................................. 898.6 An Agenda for Regional Cooperation .............................................................................. 90

Chapter 9: Development with a Human Face ......................................................................................... 939.1 Introduction ...................................................................................................................... 939.2. Human Development Profile ............................................................................................ 939.3. Poverty Elasticity of Growth ............................................................................................ 949.4. UN Millennium Development Goals ................................................................................ 959.5. Regional Efforts under SAARC for Poverty Alleviation .................................................. 959.6. Challenges for Human Development ................................................................................ 969.7. Summing Up ................................................................................................................... 100

List of Tables, Figures and Boxes

TablesTable 1.1: GDP Growth Rates in the World Economy, 1996-2004 ........................................................................................... 8Table 2.1: Proportion of Trade in GDP of South Asian Countries .......................................................................................... 19Table 3.1: Growth Rates of GDP in South Asian Countries .................................................................................................... 21Table 3.2: Sectoral Composition of Production in South Asia ................................................................................................ 24Table 3.3: Contribution of Different Sectors to Output Growth of South Asian Countries ................................................... 25Table 3.4: Overall Fiscal Position of the South Asian Economies .......................................................................................... 26Table 3.5: Fiscal Position of Central Government in India ...................................................................................................... 26Table 3.6: Change in Money Supply ......................................................................................................................................... 27Table 3.7: Inflation Rate CPI ..................................................................................................................................................... 27Table 4.1: Growth Rates of Merchandise Trade of South Asian Countries, 1991-2004 ........................................................ 29Table 4.2: Structure of Merchandise Exports ........................................................................................................................... 31Table 4.3: Structure of Merchandise Imports ........................................................................................................................... 32Table 4.4: Structure of Service Exports .................................................................................................................................... 32Table 4.5: Structure of Service Imports .................................................................................................................................... 33Table 4.6: Trade Performance Index in Basic Manufactures in South Asian Countries ........................................................ 33Table 5.1: FDI Inflows in South Asian Countries, 1991-2002 ................................................................................................. 40Table 5.2: FDI Inflows as a Percentage of Gross Fixed Capital Formation in South Asia, 1991-2002 ................................ 40Table 5.3: FDI Flows to Sector 1996-97 to 2002-03 in Bangladesh ........................................................................................ 42Table 5.4: Amount of FDI Inflows and Percentage of Total in India during August 1991 to October 2002 ......................... 42Table 5.5: FDI Received by Pakistan 1999-00 to 2001-02 ...................................................................................................... 43Table 7.1: Road Network in South Asia in 2002 ...................................................................................................................... 64Table 7.2: Railway Network in South Asia in 2002 ................................................................................................................. 64Table 7.3: Air Network in South Asia ....................................................................................................................................... 66Table 7.4: Total and Navigable Length of Rivers in South Asia ............................................................................................. 66Table 7.5: Operating Costs of Railways, Roadways and Waterways ...................................................................................... 66Table 7.6: Port Network in South Asia in 2002 ....................................................................................................................... 67Table 7.7. Port-wise Throughput (All Commodities) between India and Bangladesh ........................................................... 67Table 7.8: Container Throughput from India to Bangladesh in 2001-02 ................................................................................ 68Table 7.9: Estimated Cost of Movement of Containers in IWT .............................................................................................. 68Table 7.10. Transit Time in India-Bangladesh Trade ................................................................................................................. 71Table 8.1: Biopesticides Programmes in Pakistan ................................................................................................................... 83Table 8.2: Agreements entered into by ICGEB for Transfers of Technology to the Industrial Sector ................................... 87Table 8.3: Status of the Convention on Biological Diversity ................................................................................................... 88Table 8.4: Leading Biotechnology Institutions and Status of Biosafety in South Asian Countries ....................................... 90Table 9.1: Human Development Profile .................................................................................................................................... 94Table 9.2: Poverty elasticity of growth in the 1990s, selected countries ................................................................................ 95Table 9.3: Public Expenditure on Education and Health ......................................................................................................... 98

FiguresFigure 1.1: Growth Rates in World Economies, 1996-2004 ........................................................................................................ 8Figure 2.1: Unweighted Average Tariff Rates in South Asian Countries ................................................................................. 19Figure 2.2: Trade to GDP Ratio in South Asian Countries ....................................................................................................... 20Figure 3.1: Growth Rates of South Asian Economies 1994-2004 ............................................................................................. 22Figure 3.2: Growth of Money Supply ......................................................................................................................................... 27Figure 3.3: Inflation Rate of South Asian countries .................................................................................................................. 27

Figure 4.1: Export Growth across South Asian Countries (Actual and Projected), 1991-2004 .............................................. 30Figure 4.2: Import Growth across South Asian Countries (Actual and Projected), 1991-2004 .............................................. 30Figure 4.3 Export and Import of Industrial and Developing Countries ................................................................................... 31Figure 5.1: Share of South Asian Countries in FDI Inflows, 1991-2002 .................................................................................. 40Figure 5.2: FDI Inflows as a Proportion of Gross Fixed Capital Formation ............................................................................. 41Figure 5.3: Rate of Industrial Growth (left scale) and FDI Inflows (right scale) ..................................................................... 41Figure 7.1: Present Liner Shipping Networks in South Asia .................................................................................................... 69Figure 8.1: Biotechnology Commitments of VCFs in India ...................................................................................................... 81

BoxesBox 1.1: Reemergence of Asia in 21st Century: China and India to Lead the Way ............................................................... 8Box 2.1: Highlights of the New Plans initiated by Bhutan, India and Nepal ...................................................................... 13Box 2.2: Graduation of Maldives from LDC status ............................................................................................................... 17Box 2.3: Import Policies of Pakistan ...................................................................................................................................... 18Box 3.1: Declining Growth Rates of Agriculture: Role of Commodity Prices ..................................................................... 23Box 4.1: The O-Ring Theory of Development ....................................................................................................................... 35Box 5.1: Production Sharing in East Asia .............................................................................................................................. 43Box 6.1: The Logic of Cooperation in South Asia ................................................................................................................. 48Box 6.2: Regional Cooperation in Textiles and Clothing: Possibilities of Horizontal Specialization ................................ 50Box 6.3: Framework of BIMSTEC FTA: Recommendations of the BIMSTEC Group of Experts (GOE): ......................... 52Box 6.4: Indo-Nepal Treaty Boosts Trade .............................................................................................................................. 53Box 6.5: Indian Investments in Sri Lanka: Some Illustrations .............................................................................................. 54Box 6.6: Pak, Lanka Offer FTA Proposal to Nepal ................................................................................................................ 55Box 6.7: Pak-Lanka FTA before Year End ............................................................................................................................. 55Box 6.8: Bangladesh Plans to Hold FTA Talks with Pakistan, Sri Lanka ............................................................................ 56Box 6.9: Sri Lanka’s FTA with Maldives ............................................................................................................................... 56Box 6.10: Potential JVs between India and Pakistan .............................................................................................................. 57Box 7.1. Income – Infrastructure Relationship in South Asia ............................................................................................... 63Box 7.2: India’s National Highways Development Project (NHDP) .................................................................................... 65Box 7.3. Making Efficient Port: Lessons from Port of Colombo .......................................................................................... 69Box 7.4: India-Sri Lanka Land Bridge: Proposal ................................................................................................................... 72Box 7.5: India – Pakistan Transport Cooperation: Some Stylized Options .......................................................................... 73Box 7.6: Digital Divide: South Asia’s Readiness for e-Commerce ...................................................................................... 74Box 8.1: Bio-prospecting and Access to Biotechnology: Case of Bhutan ............................................................................. 79Box 8.2: Work Agenda for Biodiversity Conservation in South Asia ................................................................................... 88Box 8.3: Declaration of the 2nd SAARC Peoples’ Forum (“Mukti-Paani” Declaration) ................................................... 89Box 9.1: Poverty Issues in the SAARC: Some Lessons ......................................................................................................... 96Box 9.2: Educational Reforms in Sri Lanka ........................................................................................................................... 97Box 9.3: What is Pro-poor Growth? ....................................................................................................................................... 99Box 9.4: Empowering Technologies in Bangladesh ............................................................................................................... 99Box 9.5: Growing Pristine Mountain Aromatic and Medicinal Plants in Bhutan ............................................................. 100Box 9.6: Mechanized Fishing Boats Transform Lives of Maldivian Fishermen ................................................................ 100Box 9.7: Breaking Social Barriers in Nepal ......................................................................................................................... 101

Preface

The South Asia Development and Cooperation Report 2004 is the third in the series of Reportslaunched by RIS to provide an analysis of the macro-economic performance of South Asian economiesagainst the background of global trends and the policy challenges being faced by them with a specialfocus on the role that regional economic integration could play. Since the launch of the first Reportin the series in 1999, these Reports have become among the very few sources of comprehensiveeconomic analysis available for the South Asia region as a whole. The SAARC Network of Researcherson Global Financial and Economic Issues at its first Meeting held in Colombo in early 1999, appreciatedthe launch of the series by RIS and gave a mandate for preparation of such Reports on a regularbasis. Therefore, the present Report, like its predecessor issued in 2002, has been prepared by RISunder the auspices of the SAARC Network of Researchers. An early draft of the present Report waspresented and discussed at the Sixth Meeting of the SAARC Network of Researchers held in Islamabadon 8th December 2003.

RIS has an active programme of research on regional economic cooperation in South Asia sincethe early 1990 when a report on Economic Cooperation in the SAARC Region: Potential, Constraintsand Policies, was prepared. RIS also hosted the Meeting of SAARC Experts for finalization of theregional study on Trade, Manufacturers and Services that laid out the road map for economiccooperation in the framework of SAARC. Subsequently, studies on Indo-Sri Lanka economiccooperation and sub-regional cooperation in South Asia were prepared. RIS also hosted the TripartiteGroup of Experts on SAARC Vision in the late 1990s. As the National Focal Point (NFP) for theSAARC Network of Researchers in India, RIS has been coordinating a number of seminars andconferences on the challenges faced by the region and on the potential of regional economic cooperation.RIS has also launched the South Asia Economic Journal, in 2000 jointly with the Institute of PolicyStudies of Sri Lanka, Colombo under the aegis of SAARC Network of Researchers.

In preparation of this Report, we have benefited from the overall guidance of Chairman of theRIS Governing Council, Honourable Shri K.C. Pant, Deputy Chairman, Planning Commission.Ambassador Shri S.T. Devare, Vice-Chairman, RIS has been a constant source of encouragementand advice throughout.

This Report has been prepared by a Research Team of RIS comprising senior faculty members,as listed elsewhere. I would like to place on record my appreciation for their sincere efforts and hardwork put in the preparation of this Report. I would also like to thank the members of the RISadministrative staff for providing conducive environment and constant support.

31 December 2003 Nagesh KumarDirector-General, RIS

South Asia Development and Cooperation Report 2004 1

Executive Summary

© 2004, Research and Information System for the Non-Aligned and Other Developing Countries (RIS), New Delhi, India.

Improved global economicoutlook but challenges remainThe global economic outlook turnedoptimistic towards the end of 2003,after a hesitant recovery in 2002 andearly part of 2003, from the slowdownthat had set in motion towards the thirdquarter of 2000. Helped by robustrecovery of the US economy and stronggrowth in China and India, among otherAsian economies, the world economyis likely to grow at 3.2 per cent in 2003and at 4.1 per cent in 2004. The long-term growth outlook of the region also

appears robust and India and China arelikely to emerge among the world’sthree largest economies by 2050enabling Asia to regain her place in theworld economy that it had until thebeginning of the nineteenth century.

However, risks and challengesremain including those arising fromcurrency realignments, resulting froma sharp decline of the US dollar againstEuro, creeping protectionism especiallyin the western world in the context offailure of the Cancun MinisterialConference of WTO, and the rise of

terrorism in different parts of the world.The past decade has seen the emergenceof strong regional trading blocs indifferent parts of the world nearly 60per cent of the world trade beingconducted on a preferential rather thanon an MFN basis. The countries thatare not part of any trade blocs face therisk of discrimination of their exportsand loss of competitiveness. Thus, in thelight of the global trends, an immediatechallenge for South Asia is to expedite themove towards its own FTA and furthervision of deeper economic integration.

South Asia has sustained an average growth rate of 5.5 per cent per annum over the past two decades,despite many external and domestic shocks such as East Asian crisis, slow down of the world economy,Afghan and Iraq wars, oil price hikes, failure of monsoons, ethnic conflicts and threats of terrorism,among others, making it one of the most dynamic regions in the world. With more than a decade ofreforms behind them, the region’s economies are more intensively integrated with the global economy,growth of income and exports display promising outlook and inflation rates are in check. Despite suchachievements in terms of economic performance, however, the region continues to be home for more thantwo-fifths of the world’s poor. The region also fares very poorly in terms of different indicators of humandevelopment such as education, health, nutrition, among others. Therefore, the region needs to furtheraccelerate its growth process with an emphasis on human development and strengthen competitiveness todeal with the daunting challenges of alleviation of poverty, hunger, illiteracy, and disease.

The South Asia Development and Cooperation Report 2004 (SADCR 2004) argues that the regioncan face these challenges much more effectively as a group rather than individually. The regional economicintegration can, by exploiting the synergies, expand the economic opportunities available and strengthenthe growth prospects. The recent experiences with economic integration in the region suggest that itleads to expansion of trade and development in a balanced and sustainable manner. In the light of theseexperiences and against the backdrop of mushrooming regional trading blocs in different parts of theworld, the Report finds a compelling case for the region effecting its transition into an economic andmonetary union by implementing SAFTA, forming a SAARC Customs Union and introducing a SouthAsian parallel currency, as an intermediate step to a single currency, in an expeditious manner.

Among the key sectors presenting opportunities for mutually beneficial cooperation, SADCR 2004selects transport infrastructure for a detailed analysis. Transport infrastructure is not only an importantdeterminant of economic development but is also critical in exploiting the gains of economic integrationresulting from geographical proximity. Earlier SADCR 2002 focused on energy sector for a detailedanalysis of the potential and challenges of cooperation. Among the core technologies that have emergedas the key drivers of development, the present Report selects biotechnology for detailed analysis in viewof its tremendous promise for promoting food security and hence alleviation of poverty and hunger inthe region. SADCR 2002 has already covered the potential and challenges for cooperation in the othercore technology, viz. information and communication technologies.

These are some of the issues addressed by the Report. In what follows we recapitulate some majorhighlights arising from the contents of the Report.

South Asia Development and Cooperation Report 20042

South Asia’s Reforms andGlobal Economic IntegrationSouth Asian countries have carriedforward the process of reforms startedduring the early 1990s. The trendssuggest that the focus of reforminitiatives in the recent years has shiftedto domestic sectors of the economieswhich aim at bringing about greatercompetition in the domestic economyand also on fiscal management.

As a result, the South Asianeconomies today are much more openand deeply integrated with the worldeconomy than in 1990s. While this hasgiven them an opportunity to takeadvantage of the trends in internationalspecialisation and absorb the spilloversof knowledge-creation in different partsof the world, it has also made theregion’s economies more vulnerable toexternal economic shocks, as is clearfrom the growing synchronisation ofbusiness cycles.

Macroeconomic Performanceand Outlook of South AsianEconomiesThe growth performance of the regionsuffered over the past few years onaccount of both difficult externalenvironment as well as domesticproblems. However, the growth outlookin 2003/04 and 2004/05 appearspromising with South Asian GDPexpected to grow at 6.9 and 7.2 percents respectively. This growthperformance makes the region the secondfastest growing in the world after China.Another interesting development is thebroad based nature of growth with all theeconomies displaying growth dynamism.In particular, the least developedeconomies in the region like Bangladeshshowed markedly superior industrialdynamism in terms of development ofmanufacturing industries and improvedcompetitive industrial performance. Inother words, there is an evidence towardsa convergence of economic structuresin the region.

Service sector has emerged as thekey driver of growth in the region

contributing nearly half of its incomeand more than half of its growth. Theregion’s economies have also built-upsubstantial foreign exchange reservesto provide exchange rate stability andhave been successful in bringingdown inflation rates even though moreneeds to be done in the area of fiscalmanagement.

Trade Performance andCompetitivenessThe export performance of the SouthAsian countries has suffered over thepast few years on account of fallingglobal demand resulting from the EastAsian crisis and the world economicslow down. In the first two years ofthe millennium, the export growth ratesof most of the countries in the regionturned negative. With the recovery ofthe world economy, the exportprospects in the near-term have turnedoptimistic and region’s exports are likelyto grow at a robust rate of about 12 percent in 2003/04 and 2004/05.Furthermore, the trade growth ratesacross the countries of the region areconverging. While the developedcountries continue to be the principalmarkets, the integration of the regionwith East Asian countries over the pastdecade is quite visible. Trade incommercial services of the region hasalso increased substantially over the pastdecade. However, South Asia’sperformance in terms of product andmarket diversification has beenrelatively poor. South Asian countrieshave also not been able to upgrade theskill and technology profile of theirexports which has implications in termsof value addition and competitiveness.The region needs to pay attention toinnovative activity to upgrade thetechnology profile of exports.

The Report underlines the role ofregional cooperation in strengthening theexport competitiveness of the region forthird country exports. For instance, inthe context of sustained decline incommodity prices, the Report calls forpromotion of joint ventures of regional

commodity exporters to undertakepackaging and marketing on behalf ofjoint venture partners to increase thevalue-addition in traditional commodityexports such as tea, coffee, jute,cardamom, rice, etc. which arecurrently exported in bulk and aresubject to low unit value realisation.

For South Asian countries, one ofthe major challenges is to prepare theirtextiles and garment industry for thephase-out of MFA quota regime by2005 which would expose them tocompetition from, among others, China,and Southeast Asian countries. TheReport finds the role of regionalcooperation in improving thecompetitiveness of the South Asiangarment industry by increasing verticalintegration, capturing economies ofscale, horizontal specialisation,incorporating innovative designs andtaking a stake in the global marketingnetworks. The South Asian countriesshould consider setting up of SouthAsia level textiles and clothing groupsto foster an integrated South Asiantextiles sector. This approach couldavoid the intense inter-se competitionthat prevails today. In order to securetheir markets overseas and to realizea greater proportion of value added,the consortia of South Asian exportersshould also consider taking over a fewmarketing and distribution chains in theirlines of production in developedcountries.

Regional cooperation can also befruitful for dealing with emergingenvironment and food safety relatednon-tariff barriers in developedcountries, such as sanitary and phyto-sanitary (SPS) measures and technicalbarriers to trade that are potentially verydamaging for South Asian exports.South Asian countries could considerlaunching a regional eco-label to maketheir products more visible andacceptable than individual labels besidesconserving resources on its promotion.Regional cooperation could also befruitful in compliance with newemerging standards.

Executive Summary


Regional Cooperation with respectto WTOThe Report also finds substantial scopefor regional cooperation in areas suchas building a world trading systemresponsive to region’s developmentneeds. The Cancun MinisterialConference has demonstrated theimportance of coordinated positions bydeveloping countries in achieving theirobjectives. South Asian countries haveplayed a key role in evolving andstrengthening the coalitions ofdeveloping countries. The failure ofCancun also provides an opportunity forthe WTO membership to seek aredressal of the emerging asymmetriesin the world trading system before theymove forward. Drawing from the WorldTrade and Development Report 2003 byRIS, the Report proposes an agenda forreform of the world trading system thatdeveloping countries in general andSouth Asian countries in particular maytake up in the interest of building adevelopment-friendly world tradingsystem. The main elements of thisagenda include development assessmentof the multilateral trading system by anindependent commission, reform of thedecision-making process, broadbasedand more representative Secretariat,setting up of a WTO Watch Dog ofdeveloping countries, strengthening theprovision of technical assistance,emphasis on outstanding implementationissues rather than expansion ofnegotiating agenda, proactiveframework agreements on special anddifferential treatment, movement ofnatural persons and on transfer oftechnologies. It also presents an agendafor cooperation among South Asiancountries in the implementation of WTOcommitments.

Foreign Direct Investmentand Global ProductionNetworksFDI inflows to South Asia have grownover the past decade in response topolicy liberalization. South Asiancountries have also been able to increase

their share in FDI inflows received bydeveloping countries especially since theyear 2000. However, their share is stillrather marginal which is attributed to anumber of factors such as low-incomelevels, poor quality of infrastructure andgeographical and cultural distance withmajor sources of capital in the West orthe East. They have also not exploitedthe potential of intra-regional FDIinflows that account for the bulk of FDIinflows received by the Southeast Asiancountries.

South Asian countries have also notbeen able to integrate themselves withglobal production networks ofmultinational corporations and emergeas bases for export-oriented productionfor them in a significant manner exceptfor growing participation of India inbusiness process outsourcing and globalR&D activity of MNCs. Participationin regional economic integration schemesemerges as a major determinant forhosting such offshore production basesby MNCs. In this context, South Asiacould take lessons from experiences ofASEAN that are trying to attract export-oriented FDI through ASEAN FTA andASEAN Investment Area. Regionaleconomic integration in SAARC willenable the region not only to emerge asa more attractive destination for FDIinflows in general but also for export-oriented FDI besides promoting intra-regional FDI.

Regional EconomicIntegration: Lessons fromRecent ExperiencesThe South Asian region has attemptedto intensify regional economicintegration over the past decade throughregional, sub-regional and bilateralapproaches. The progress of SAPTA interms of tariff liberalization has beenrather slow because of product-by-product or positive list approachadopted. Trade liberalization in theregion has also been attempted underbilateral FTAs such as between India-Sri Lanka, besides India-Bhutan andIndia-Nepal. Several new bilateral FTAs

are currently underway involvingMaldives, Pakistan, Bangladesh, SriLanka and Nepal. In addition a numberof South Asian countries and SoutheastAsian countries are participating inBIMST-EC that is moving towards anFTA.

Even the limited experience withtrade liberalization under SAPTA hasproduced encouraging results in termsof trade expansion. The bilateral FTAsin the region appear to have led toequitable expansion of trade flows withexports from smaller and lesserdeveloped partners growing faster. TheFTAs have also led to investment flowsand trade-creating joint ventures whichfacilitate development of supplycapabilities of lesser developedpartners. These experiences haveprompted the governments to expandthe scope of India-Sri Lanka FTA tocover trade in services and investmentsin the framework of a ComprehensiveEconomic Partnership Agreement. Thestudies suggest that SAFTA could leadto substantial expansion of mutual tradeand efficiency-seeking investment in theregion.

The research shows that the regionsatisfies many of the criteria for anoptimal currency area and could benefitfrom adoption of a single currency.However, the Report recommends thata single currency may be evolved in aphased manner beginning with a parallelcurrency (South Asian Rupia or SAR)as a unit of account backed by aSAARC Reserve Fund. This step willnot only facilitate intra-regional trade butwill also create a mechanism for fundingof joint infrastructural developmentprojects. Eventually, the SAR couldreplace national currencies.

In light of the existing experienceswith economic integration in the regionand in view of the global trend ofadoption of regionalism as a strategy forgrowth, the Report recommends thatSAARC completes its transition towardsSAFTA, the SAARC Customs Unionand the South Asian Monetary andEconomic Union in an expeditious

Executive Summary


manner. The region should also adopt aSAARC Agreement on Promotion andProtection of Investments and movetowards harmonised investment policiesacross the region to facilitate intra-regional investments. It has been arguedthat these steps will help facilitateefficiency-seeking restructuring ofindustry in the region, thus, enablingthem to exploit economies of scale andspecialisation. Thus, Sri Lanka mayemerge as the region’s hub for rubber-based industries, Bangladesh forenergy-intensive industries and Bhutan,forest-based industries, and so on. Theregional economic integration will alsomake member countries, especially thesmaller ones, more attractivedestinations for third countryinvestments by obviating the constraintof small domestic market.

Cooperation in TransportInfrastructureGiven the primacy of infrastructure inpromoting economic development onthe one hand and regional integration onthe other, the Report undertook a detailedanalysis of the present state ofinfrastructure development and thepotential for cooperation amongdifferent South Asian countries. It hasbeen shown that adverse impact onaccount of the relatively low level ofinfrastructure development in the regionis compounded by limited interlinkingof transport infrastructure acrossdifferent countries in the region. Thisin turn has the effect of increasedtransportation cost and underminingcompetitiveness and growth in a contextof integration with the world market.Much could be gained by regionalcooperation and a concerted effort tolearn from each other in all the modesof transportation.

The Report calls for an activeapproach towards infrastructuredevelopment at the national levels and a‘Common Transport Policy’ in SouthAsia for optimum utilisation of existingutilities as well as expansion of newfacilities in the region. The possible

elements of a Common Transport Policycould be harmonization of technicalstandards such as truck size and weightregulations; railway gauge and rollingstocks across the region; simplificationof documentation and clearanceprocedures; standardisation of cabotagerules and regulations on the movementof certain goods. In addition, the Reportcalls for an Open Sky Policy in SouthAsia for airlines originating from withinthe region, facilitation of movement ofcontainer trains and goods vehicleswithin the region subject to fulfillmentof individual countries’ roadtransportation rules and regulations.Report also discusses a number ofpossibilities for improving transportlinkages through development of inlandwaterways, shipping links, highwaysand railway lines.

Finally, the Report suggest thatSouth Asian countries also need to paymore attention to their telecommuni-cations infrastructure and readiness forelectronic commerce (e-commerce)that is becoming a critical factor ininternational competitiveness.

Biotechnology andDevelopment in South AsiaBiotechnology’s potential inaddressing food security concerns,poverty reduction and development atlarge is now well recognised in SouthAsia. In spite of the constraints ofresources, facilities and talent, almostall the countries in the region haveinitiated some programmes inbiotechnology over the past decade.The focus of these programmes isgenerally on agriculture and foodsecurity. South Asian countries alsoface a major challenge in terms ofevolving the regulatory norms forbiotechnology. A number of countrieshave evolved biosafety norms butsome times they are not consistentwith international treaties such asCartegena Biosafety Protocol. Thereare also challenges in dealing withtrade, in genetically modifiedorganisms and products (GMOs).

The Report proposes an agenda forregional cooperation in harnessingbiotechnology for development. Theelements of the agenda include membercountries using the forum of SAARCfor evolving the guidelines for biosafetynorms, for regulations governing tradein genetically modified organisms andproducts in addition to exchange ofexperiences, knowledge and expertise.The Report also calls for a commonposition concerning the conservation ofbiodiversity and the Convention ofBiological Diversity (CBD), IPRsregime with respect to biotechnology,among other issues. It calls for jointresearch to address issues likeincreasing vitamin A, iron and othernutrients in the edible portion of variousplants and crops, and for integratednutrient management and developmentof biofertilizers and biopesticides. Jointresearch could also address salinity anddrought resistance in some importantcrops as many parts of South Asia areaffected from these problems.Cooperation in human resourcedevelopment could also be instrumentalin removing constraints faced by someSouth Asian countries in harnessingeven the first generation ofbiotechnology. The cooperation couldalso extend to pooling of resources forjoint facilities and databases forcommon use. In order to facilitateregional cooperation between enterprisesof the region including provision forinputs for policy-making, a South AsianForum of Biotechnology Enterprisescould be formed. Finally, the Reportrecommends establishment of a SouthAsia Biodiversity Conservation Fund(SABCF) for meeting the long felt needof a financial mechanism required forthe conservation and management ofbiodiversity.

Human DevelopmentFinally, the Report discusses challengesand prospects for regional cooperationin the area of human development.Along with liberalized policy reformsand greater integration with the world

Executive Summary


economy, South Asian countries haverecorded considerable progress inhuman development indicators likepoverty reduction, educationalattainment, improved health facilities,etc. Yet, the levels of achievement havevaried across countries and thechallenging task of further improvingthe quality of life of people still remains.Given the fact that the growth of

investment in human development inmost of the countries has not beencommensurate with their economicgrowth, the Report underlines the needfor greater focus on social sectorinvestments such that the countries areable to achieve the UN MillenniumDevelopment Goals. On the optimisticside, the Report highlights some of theinitiatives undertaken by different

Executive Summary

countries in the region to improve theliving conditions of targeted groups andcalls for scaling up and sharing of suchsuccessful experiences among theSouth Asian countries. Strengthening ofregional cooperation efforts towardshuman development in general andpoverty reduction in particular, initiatedunder the aegis of SAARC, have alsobeen emphasised by the Report.


1.1 Introduction

With reforms in trade andinvestment regimes undertaken

during the 1990s, the South Asianeconomies today are far more integratedwith the world economy than they wereearlier. Global economic integrationenables them to benefit from theemerging international specialization,obviates the constraints on theirdevelopment by the size of domesticmarket and allows them to absorb thespillovers of knowledge creation indifferent parts of the world. The globalintegration also means that the SouthAsian economies are influenced by theemerging international trends in a morefundamental manner than earlier bothpositively and negatively. The globaltrends and prospects affect the SouthAsian economies not only through trade,but also through growing integration ofcapital markets.1

Against this backdrop, this Chapterexamines the recent trends in theworld economy and the prospects forthe coming years (Section 2). In thesubsequent section, the recentdevelopments concerning the worldtrading system are reviewed againstthe background of the collapse of the

Cancun Ministerial Conference ofWTO and lessons drawn are from thatfor the South Asian countries. It alsooutlines an agenda of South Asiancooperation on WTO-related issues.

1.2. Global Economic OutlookThe global economic outlook towardsthe end of 2003 turned optimistic afteruncertain recovery in 2002 and earlypart of 2003 from the slowdown thathad set in motion towards the thirdquarter of 2000. Although the worldeconomy seemed to have turned thecorner in 2002 there wereuncertainties about the outlook for2003 caused by the Iraq War in theearly part of the year and then fromthe outbreak of Severe AcuteRespiratory Syndrome (SARS) in thefirst half of 2003 that affected anumber of economies, especially inEast Asia. The growth forecasts forthe different regions have been revisedupwards in the light of a robustrecovery reported by the US economyin the third quarter; Europe turning thecorner and China forging ahead withstrong growth. The third quarter GDPgrowth in the US at an annual rate of8.2 per cent represents the highestquarterly growth in 20 years. The US

economy is now expected to record a2.9 per cent growth of GDP in 2003compared to earlier forecast of about 2per cent. Europe has also started toshow signs of a gradual turn around afterstagnating in the first half of 2003.

Japanese economy also seems tobe coming out of the long drawnrecession. Helped by aggressivemonetary policy initiatives, bankingreforms and corporate restructuring,business investment is registering ahealthy rise. In light of thesedevelopments, the growth forecast ofJapanese GDP for 2003 have beenrevised up sharply from 0.9 per cent to2.4 per cent.

Given these trends in the majorindustrial economies, the G-7economies are expected to experiencea GDP growth rate of 2.1 per cent in2003 compared to 1.6 per cent in 2002.The forecast for 2004 has been steppedup to 3.1 per cent (Table 1.1). Theworld economy is likely to grow at 3.2per cent in 2003 and at 4.1 per cent in2004. The step-up in the growth outlookin the advanced economies also tendsto have a positive effect on the growthof developing economies (Fig. 1.1)which are likely to grow at 5.1 per centin 2003 and at 5.9 per cent in 2004.

Global Economic Trends andSouth Asia1



The developing Asian countries areprojected to record a robust growthperformance of 7.4 per cent in 2003and 7.8 per cent in 2004, largely onaccount of strong growth in China andSouth Asia. The Chinese economy isexpected to grow at 8.2 per cent in 2003despite being one of the worst affectedeconomies from the SARS epidemic.Major ASEAN economies are also likelyto improve their growth performanceto 4.5 per cent in 2003 and further to5.9 per cent in 2004 compared to 4.3per cent recorded in 2002. Among theASEAN countries, the star performersare Vietnam growing at 7 per centfollowed by Thailand at 6 per cent. Thefact that China and ASEAN economiesare able to improve their performancein the second half of 2003 suggests thatthey were able to contain the adverse

effects of SARS epidemic that affectedthem in the first half of the year.

The South Asia region, as discussedin greater detail in Chapter 3, is likely toimprove its growth performance to arobust 6.9 per cent in 2003 and furtherto 7.2 per cent in 2004 compared to4.2 per cent recorded in 2002 helpedby good monsoon and industrialrecovery in the biggest economies ofthe region, namely, India and Pakistan.

The dynamism, of Asian economiesespecially China and India, has attractedmuch attention world wide. Recentprojections have shown that China andIndia will emerge among the largesteconomies in the world in the coming50 years and will regain their share inthe world GDP that they had until earlynineteenth century (Box 1.1).

Risks and ChallengesAs 2003 draws to close a number ofuncertainties and risks remain on thehorizon. These include the exchangerate realignments with the rise of theeuro and secular decline in dollar.Between January 2002 and December2003 dollar had lost 40 per cent of valueagainst euro. Such a rise in eurothreatens to damage Europeancompetitiveness and nascent recovery.Pressure is building upon China forfloating the currency as the peggedexchange rate with dollar has led to

Table 1.1: GDP Growth Rates in the World Economy, 1996-2004

(percentages)

1996 1997 1998 1999 2000 2001 2002 2003p 2004p

World 4 4.2 2.8 3.6 4.8 2.4 3 3.2 4.1Advanced economies (G7) 2.7 3.2 2.8 3 3.5 0.8 1.6 2.1 3.1Developing countries 6.6 5.9 3.5 3.9 5.7 4.1 4.6 5.1 5.9Developing Asia 8.3 6.6 4 6.2 6.8 5.8 6.4 7.4 7.8ASEAN-4 7.3 3.4 -9.4 2.9 5.2 2.9 4.3 4.5 5.9South Asia 7.5 4.5 6 5.7 4.5 5 4.2 6.9 7.2

(p): Projections December 2003.Source: RIS based on IMF/WEO database and forecasts by ADB, ADB/REMU, Goldman Sachs, OECD among

other sources.

Box 1.1: Reemergence of Asia in 21st Century:China and India to Lead the Way

With rapid growth of major countries such as China, India among others, Asia is expectedto become the center of gravity of the world economy that it was in the eighteenth century. AnOECD study by Angus Maddison shows that in 1000AD, Asia (except Japan) accounted formore than two thirds of world GDP based on the strengths of the Chinese and Indian civilizations.China and India were the leaders of the world in terms of technological and economic developmentduring the most of the period from 500AD to 1500AD. By early 15th century India had evolvedinto a sophisticated agrarian economy that sustained a large empire. Textile industry was fairlywell developed, overseas trade was impressive, and the talent in science and mathematics werewell known. By fifteenth century, China had also established first unified and a centralizedpolitical administration and early emergence of a commercial society helped by temperateclimate, rapid population growth, and alluvial agriculture and voyages. In terms of innovation,they invented the compass, gunpowder, printing press, and paper currency. In 1500, China andIndia alone accounted for 50 per cent of world GDP with each sharing roughly 25 per cent.Because of rising incomes of western Europe, by 1820 AD Asia’s share in world GDP had comedown but was still substantial at 56 per cent. Asian incomes stagnated during the period 1820to 1950 bringing its share in world GDP down to only about 20 per cent. However, led by thedynamism of Japan, China, and India, Asia’s share in the world GDP has risen and today itstands at around 40 per cent.

A recent study by Goldman Sachs shows that Asia is on its way to regain its lost share inthe world economy by 2050. As recording to these estimations share of China, India and Japanin world GDP is expected to reach 57 per cent by 2050.

Goldman Sachs expect that led by rapid growth, ‘India’s economy, for instance, could belarger than Japan’s by 2032, and China’s larger than the US by 2041’. ‘In US dollar terms, Chinacould overtake Germany in the next four years, Japan by 2015 and the US by 2039. India’seconomy could be larger than all but the US and China in 30 years’.

Using the latest demographic projections and a model of capital accumulation andproductivity growth, Goldman and Sachs find that ‘India has the potential to show the fastestgrowth over the next 30 and 50 years. Growth could be higher than 5 per cent over the next 30years and close to 5 per cent as late as 2050 if development proceeds successfully’.

Source: RIS based on Maddison (2000), Wilson and Purushothaman (2003) and Rana (2003).

Figure 1.1: Growth Rates in WorldEconomies, 1996-2004

-10

-8

-6

-4

-2

0

2

4

6

8

10

South Asia

ASEAN

Developing Asia

Developing countriesAdvanced economies (G7) World

2004p2003p2002200120001999199819971996

Global Economic Trends and South Asia

Source: RIS based on IMF/WEO database andforecasts by ADB, ADB/REMU, Goldman Sachs,OECD among other sources.



devaluation of renmibi vis-a-vis othercurrencies.

These have implications for SouthAsia too. Indian rupee, for instance, hadalso risen against the dollar for mostpart of 2003, gaining about 8 per centwhich is eroding competitiveness ofIndian exports. The exchange raterealignments in turn are caused by largeand growing current accountimbalances in the US.

The other concern is the creepingprotectionism in the world economy,especially in the developed countries, incontext of the failure of CancunMinisterial Conference of WTO. Indifferent parts of the world regional andbilateral free trade agreements (RTAsand FTAs) have multiplied. As a resultof these RTAs, nearly 60 per cent ofthe world trade is conducted onpreferential basis and not on MFN basis.The countries that are not part of anytrade blocs face the risk ofdiscrimination against their exports andloss of competitiveness. Thus, in thelight of the global trends, an immediatechallenge for South Asia is to expeditethe move towards its own FTA andconcretize the vision of deepereconomic integration.

1.3. World Trading System:Post-Cancun ScenarioMultilateral Trade Negotiationsand Developing Countries:Growing AsymmetriesThe completion of the Uruguay Roundwith the setting up of WTO in 1995marked an important turning point forthe world economy. What started as aprocess of trade liberalization underGATT has come to embrace broaderparameters of policy hitherto subject todecision-making at the national levels.2

The Ministerial Conferences of WTOgenerated a lot of interest among thepolicy makers and the civil society,given the importance of decisions takenfor the development prospects of themember countries.

The express purpose and objectiveof the multilateral trade negotiations

(MTNs) is to liberalize trade so thatefficiency gains become available to theworld economy at large. However, it hasbeen recognized that there are unequalplayers in the game and developingcountries are constrained by theirfinancial and physical capabilities toundertake equal commitments. Theyneed flexibilities, to pursue theirdevelopment policy objectives, that havebeen available to developed countries inthe early stages of their development.Hence, the concept of special anddifferential treatment (S&DT) todeveloping countries on a non-reciprocalbasis was built into the process.

The Uruguay Round (UR) alsoplaced substantial obligations ondeveloping countries in terms of theliberalization of trade and their policyregimes with respect to intellectualproperty rights, investments, and tradein services. Developing countriesundertook commitments to expand tariffbindings to cover 61 per cent of theirimports compared to 13 per cent earlierand have offered $ 15 billion worth ofconcessions by way of reducing theirtrade-weighted average bound tariff onimports from industrialized countriesby 28 per cent.

Developing countries were luredinto accepting these substantialcommitments by the promise ofadditional market access to them bydeveloped countries throughliberalization of agricultural trade,textiles and clothing and movement ofnatural persons. The gains from the URproposals of liberalization in these areaswere estimated to the tune of US$ 213to US$ 510 billion-a-year rise in worldincome with developing countriesbenefiting to the tune of $86 to $122billion. Contrary to these claims, it hasnow been empirically shown that muchdeeper commitments have beenundertaken by developing countries inthe UR and the mercantilist balanceresulting from trade liberalization hasbeen in favour of developed countries.The UR Agreements, such as TRIPs andTRIMs, are leading to significant income

transfers from developing countriesbesides reducing the policy space fordevelopment. The S&DT provisionshave been considerably diluted andreduced to just longer transitions forimplementation.

The developed countries, whilepreaching the virtues of free trade todeveloping countries, have beenresistant to bringing down peak tariffs,high specific duties, and tariff escalationthat affect imports from developingcountries. A startling example is the factthat tariffs collected by the US on $2billion worth of imports fromBangladesh are higher than thoseimposed on imports worth $30 billonfrom France.

The market access commitmentsin textiles and clothing have beenbackloaded and only about 20 per centof imports under specific quotarestrictions have been liberalized in theseven years of implementation till 2002.The agriculture trade liberalization indeveloped countries has been underminedby dirty tariffication. The average appliedtariff rates applicable to agriculturalproducts compared to those on industrialgoods have been higher by 641 per centin Japan, by 353 per cent in the EU, andby 100 per cent in the US.

Despite the promise of improvedmarket access in the services of interestto developing countries, very fewcommitments have been made bydeveloped countries in Mode 4.Furthermore, almost all thesecommitments are subject to limitations,such as economic needs test thatusually render them ineffective. Newbarriers to movement of natural personsare being evolved in different parts ofthe world, such as legislations outlawingbusiness process outsourcing. Studieshave found staggering welfare losses forthe world economy from the protectedmarkets for labour. Even a limitedliberalization of labour markets coveringjust 3 per cent of work force has thepotential to generate welfare gains ofUS$ 156 billion per year, according torecent studies.


There has been continued resort toquotas and other non-tariff barriers(NTBs). As many as 30 per cent tarifflines in basic metal industries in the US(and 34 per cent in Japan), for instance,are subject to core NTBs. There hasbeen a proliferation of NTBs in the formof environmental and food safetystandards much higher than theinternationally agreed norms andcontingent protection against developingcountries. Moreover, proliferation ofregional and bilateral free tradearrangements in the developed world arediverting trade and investments awayfrom developing countries.

In addition, there seems to be aprotectionist backlash in the developedcountries inspired from the strategictrade policy aimed at strengthening thecompetitiveness of their nationalchampions at the cost of sustainable andequitable growth of world trade. Whileheavy subsidization of developedcountry agriculture has become wellknown from the ongoing debates in thecontext of WTO’s Agreement onAgriculture, the continued and risingsubsidization of industrial sectorremains virtually unnoticed. Not onlyhave developed countries exploited thegrey areas available in the multilateralrules, they have also included exceptionsfor the kind of policies and practicesthat they wish to make use of, such asR&D subsidies and huge financialincentives for investment that are asdistorting as other actionable subsidies.The US has been giving US$ 4 billion insubsidies to the exporting enterprisesunder the Foreign Sales Corporations(FSC). These subsidies have beendeemed illegal by the WTO’s Panel ona complaint brought by the EU.However, these are now being replacedby even bigger tax cuts worth US$ 120billion over the ten years for companieshaving manufacturing bases in the US.

The agricultural subsidies too aregrowing despite the promises ofreduction made in the Uruguay Roundand the Doha Declaration. The US hasannounced the most generous farm

subsidy package, in history, in its FarmBill 2002. Arguments likemultifunctionality are made to justify theever increasing agricultural subsidies inthe EU. Even export subsidies (calledexport credits in the US) are notreduced. While trade relatedperformance requirements such as localcontent regulations have been phasedout under TRIMs Agreement, developedcountries extensively resort to policieslike screw driver regulations, rules oforigin, buy-local regulations that are akinto local content regulations.

The process is not leading to thegrowth of world trade either.Quantitative studies do not find theprocess of GATT/WTO to be leadingto either trade liberalization or growthof trade. The developing countries, withthe exception of China, have not beenable to increase their shares in worldtrade. The terms of trade of developingcountries have deteriorated. As a resultof these trends, the growth rates in alarge number of countries in 1990s havebeen lower than in the 1980s andinequalities have risen in a large numberof developing and transition economies.

This situation is in sharp contrastto the avowed goals of the WTO as setout in the preamble to the MarrakeshAgreement recognizing the ‘need forpositive efforts designed to ensure thatdeveloping countries... secure a sharein the growth in international tradecommensurate with the needs of theireconomic development... mutuallyadvantageous arrangement directed tothe substantial reduction of tariffs andother barriers to trade and to thediscriminating treatment in internationaltrade’.

Doha Development Agenda andthe Cancun MinisterialThe Doha Ministerial Conferenceattempted to restore the emphasis ondevelopment in the WTO. The DohaDeclaration called for positive effortsto ensure developing countriesbenefiting from enhanced market accessand balanced rules. In substantive terms

the highlights of the Doha Agendaincluded a commitment in the area ofagriculture to substantially improvemarket access, progress towardsphasing-out of all forms of exportsubsidies and substantial reduction oftrade distorting domestic support. Italso accepted the primacy of publichealth concerns and offered to provideflexibility to poorer countries from theprovisions of TRIPs Agreement toimport cheaper generic medicines. Inthe area of market access for industrialproducts, commitments were made toeliminate or reduce peak tariffs, hightariffs, tariff escalation and NTBs, inparticular, on products of export interestto developing countries. Commitmentswere also made to review the S&DTprovisions for developing countries tomake them more precise, effective andoperational.

However, the progress since theDoha Ministerial has been far fromsatisfactory. Almost all the deadlinesproposed, that were important from thepoint of view of developing countries,have been missed. On the other hand,developing countries were pushed togive the negotiating mandate on theSingapore Issues at the CancunMinisterial. The draft modalities formarket access in agricultural and non-agricultural goods that were proposedby developed countries suggested thatthe principle of less-than-full-reciprocityas enshrined in the Doha Mandate hadbeen undermined.

The Fifth Ministerial Conference ofWTO held in Cancun in September 2003was to advance the Doha Agenda.However, it collapsed as it could notadopt a Ministerial Text. It was not thefirst time that a Ministerial Meeting inGATT/WTO failed to reach aconsensus. However, there was aqualitative difference. This time itcollapsed because of a sharppolarization on the North-South lines.Developed countries had shown theirresistance to phase out the billions ofdollars of export subsidies and domesticassistance that they give to protect their



farm sector while seeking to extractnew concessions from developingcountries in the form of negotiatingmandate on Singapore Issues.

The developing countries had gottheir act together much better this time,thanks also to a lot of work done bySouth Asian negotiators in thepreparatory process and in Cancun, bybuilding an effective coalitions that heldtogether. The widespread backlashagainst the high-handed attitude ofdeveloped countries was highly visiblein Cancun.

On the Singapore Issues, a Groupof 16 Countries led by Malaysia andIndia, with the support of 30 leastdeveloped countries in a submission tothe Conference sought furtherclarification rather than agreeing to givea negotiating mandate. The group of74 African, Caribbean and Pacific(ACP) countries also sought tocontinue the clarificatory processwithout a negotiating mandate. In utterdisregard to these submissions bynearly 70 developing countries, therevised draft Ministerial Text issuedon 13 September 2003, wanted to givenegotiating mandate on all of theseissues except for the issue of‘competition’. Competition wasdropped because of unwillingness ofthe US to negotiate i t . From adevelopment point of view, the DraftMinisterial Text proposed the worstpossible combination, viz. to havebinding international rules oninvestment but not on competition.Expectedly, developing countriesheavily criticized the draft MinisterialText with the main demandeur ofnegotiations on these issues. As aresult, the EU found itself increasinglyisolated which began to soften itsdemand towards the end of theConference.

On agriculture, developingcountries led by Brazil, India, and Chinaformed an effective coalition of 17countries that had submitted a counterproposal in Geneva to the US-EUproposal. Not only that they held

together but kept growing to becomea group of 20 (G-20) at the start ofthe Ministerial. By the second day thegroup had grown to 23 and before theend of the Ministerial 10 morecountries were supporting thiscoalition despite the attempts by theUS and EU to break these with bothcarrots and sticks. In addition, agroup of four West and Central Africancountries was seeking elimination ofextensive subsidies given in the US tocotton farmers that was leading tostarvation of cotton farmers in thesecountries. This group also receivedsupport from a number of countriesincluding India.

The draft Ministerial Text of 13September 2003, while disregarding thedemand by G-20 for phasing outsubsidies by developed countries, triedto break their ranks by offering phasingout of export subsidies for selectproducts. It also tended to follow theUS-EU proposals in most partcompletely ignoring the alternativeproposals put on the table by G-20. Itreceived protests from developingcountries.

With none of the sides willing torelent, the collapse was inevitable. TheConference was called off with a six-point Ministerial Statement seeking thecontinuation of the process at theGeneral Council’s senior officers levelmeeting on 15 December 2003. Thesubsequent consultations in Geneva inthe Green Rooms on each of thecontentious issues suggest nomovement forward to expect an earlyrevival of the negotiations. Developedcountries have actually hardened theirpositions. For instance, EU had agreedto drop its demand for a negotiatingmandate on three of the four SingaporeIssues in the face of opposition fromdeveloping countries. However, in theGreen Room consultations it has goneback to its pre-Cancun position ofseeking a negotiating mandate on all thefour issues. As a result, the GeneralCouncil Meeting of 15-16 December,2003 ended without any substantive

progress. The process may be revivedin late February 2004.

Lessons from CancunCancun will be remembered for theability of developing countries to holdtogether till the end despite heavypressure exerted by the world’s biggesteconomic and political powers. Itheralds the beginning of a new phasein the multilateral trade negotiations eventhough the talks collapsed. Developedcountries henceforth would not be ableto take developing countries for granted,as they have so far been. Therefore, itmay serve the cause of development inthe future negotiations.

It is clear that developing countriescan secure their interests in themultilateral trade negotiations muchbetter by building effective issue-basedcoalitions. They should continue to holdtogether and build a world tradingsystem more responsive to their needs.

Need for a Reform of the World Trading SystemThe failure of Cancun also providesan opportunity to the WTO membershipto seek a redressal of the emergingasymmetries before they move forward.In its World Trade and DevelopmentReport 2003 RIS has proposed aninventory of reform of the worldtrading system that developing countriesin general and South Asian countries inparticular may take up in the interest ofbuilding a development-friendly worldtrading system. The main elements ofthis agenda that are of particular interestto South Asian countries could include:systemic reforms seeking adevelopment review of the multilateraltrading system by an independentcommission, reform of decision-makingprocess, creation of a broadbased andrepresentative secretariat, creation of aWTO watch dog of developingcountries, and strengthening theprovision of technical assistance.

In terms of substantive issues,South Asian countries could emphasizeon outstanding implementation issues



rather than expansion of negotiatingagenda and take proactive initiativesseeking a framework agreement onmovement of natural persons, aframework agreement on S&DT, andtransfer of technology. They may workfor recognition of economically activepopulation dependent on agriculture(EAPA) as a criteria in the Agreementon Agriculture besides food securityconcerns and seek to preserve the less-than-full-reciprocity in the modalities fortariff reduction as enshrined in the DohaDeclaration.

An Agenda for Cooperationamong South Asian Countries onWTO-related IssuesThe emerging WTO regime is importantfor the national development, trade,investment and technology policies ofmember countries. The ongoing roundof negotiations will have an importantbearing on the development process ofthe developing countries. Therefore, thedeveloping countries need to deliberateover the mandate given by theMinisterial Meetings and preparethemselves to take part in the ensuingnegotiations effectively to safeguardtheir interests. Issues of preparednesson their part would also include takingadvantage of the emerging multilateraltrade regime rather than passivelyimplementing their commitments. Thiscalls for strategic thinking andconcerted action at different levels.

The developing countries in generallack strong analytical capabilities in fullycomprehending the developmentalimplications of the commitmentsimplicit in the negotiations. The situationis further complicated by themisinformation that is promoted bydeveloped countries to achieve theirstrategic objectives. Very often thetraining courses offered by international

organizations in the name of technicalassistance are also influenced by theview-point of the donors, viz. thedeveloped countries and fail to highlightthe concerns of developing countries.

The technical cooperation amongdeveloping countries could cover thefollowings:

Exchange of Experiences inImplementation of Commitments:Developing countries should fullyexploit the policy spaces that may beavailable in the WTO Agreements. Anexample in this regard is the TRIPsAgreement, where several flexibilitiesare available to be exploited to moderatethe potential adverse effect of theAgreement such as provisions forcompulsory licensing, researchexception, Bolar provisions, grey marketimports, anti-trust regulations, breedersexceptions, among others. Exchange ofexperiences and professional expertiseamong developing countries mayfacilitate such possibilities.

Technical Assistance andCooperation in Implementation orCompliance of Commitments:Compliance with some SPS standardsrequire huge technical and financialcosts. Cooperation among developingcountries may take the form of sharingthe services of experts, setting up thecommon testing and verificationlaboratories, translations of standards,etc.

Effective Coordination ofPositions: WTO negotiations are powergames. Any coordination betweendeveloping countries at the issue levelor regional levels would be moreeffective than individual countrypositions. Cancun has demonstrated theimportance of developing countriescoalitions. South Asian countries shouldestablish communications between theirrespective trade ministries and their

missions at WTO to facilitate suchcoordination.

Vigilance and Active Participationin the Proceedings: Given the highstakes involved, developing countriesneed to participate in the negotiationseffectively and with extreme vigilance.They need to back up their preparationswith adequate legal and analyticalexpertise. Introduction of small phrases,which may appear innocuous, mayeventually lead to some burdensomecommitment, as is clear from how areference to counterfeit goods in thePunta del Este Declaration snowballedinto the TRIPs Agreement.

Endnotes1 See RIS, South Asia Development and

Cooperation Report 2001/02 forevidence on growing synchronization ofthe region’s stock markets with globalones.

2 This discussion is based on the RIS,World Trade and Development Report2003: Cancun and Beyond.

ReferencesMadison, A. 2000. The World Economy: A

Millennial Perspective. Paris: OECD.Rana, Pradumna B. 2003. “Economic

Integration and Re-emergence of Asia”.Presented at RIS/ADB Seminar onMonetary and Financial Cooperationin Asia, New Delhi, 11 December. RIS.

RIS. 2002. South Asia Development andCooperation Report 2001/02. NewDelhi: Research and InformationSystem for the Non-Aligned and OtherDeveloping Countries (RIS).

RIS. 2003. World Trade and DevelopmentReport 2003: Cancun and Beyond.New Delhi: Academic Foundation forResearch and Information System forthe Non-Aligned and OtherDeveloping Countries.

Wilson, D. and Roopa Purushothaman. 2003.Dreaming with BRICs: The Path to2050. Global Economics Paper #99,Goldman Sachs, available at http:www.gs.com.



2.1 Introduction

Economic historians of the comingcenturies might describe the shift

in policy paradigm of the developingcountries from import substitution tooutward orientation during the closingdecades of the 20th century as a majorlandmark in the history of thedeveloping world. The South Asianeconomies were not mere passivespectators to this whirlpool but joinedthe process quite earnestly. Theunderlying rationale was to harness thepowers of market, to make theeconomy internationally competitive, byincreased efficiency and productivity,vibrant in growth and to bring aboutoverall socio-economic transformation.Inter-country differences in the extentand timing notwithstanding, there havebeen comprehensive policy reforms inthe 1990s, covering different sectors ofthese economies, especiallyliberalization of trade and investmentregimes with deliberate initiatives tointegrate their economies with the restof the world. The early years of thenew millennium have been marked byacceleration in the pace of reform asalso the integration with the worldmarket.

2.2 Policy Reforms: AnOverviewThe 1990s witnessed comprehensivereform programmes in almost all thecountries in South Asia. With possibleexception of Sri Lanka, which beganopening up of trade and capital flows in1977, all the other countries in the regionhave initiated major policy reforms withrespect to the external sector which,inter alia, included reduction in the leveland dispersion of tariffs and quantitativerestrictions and removing regulations onforeign investments. Reforms were notconfined to the external sector alone.

There have been significant reformmeasures with respect to the domesticsectors of the economy like theindustrial de-licensing to do away withentry barriers, reforms in agriculturalprices, removal of subsidies and fiscalconsolidation. The early years of thenew millennium witnessed furtherinitiatives to consolidate the efforts madeduring the last decade. The period alsowitnessed the launching of new plansin Bhutan (9th plan), India (10th plan) andNepal (10th plan) (see Box 2.1 for thehighlights). Since there was inter-country variation in the focus as well

Reforms and Global EconomicIntegration of South Asia2


Box 2.1: Highlights of the New Plans initiated byBhutan, India and Nepal

Ninth Plan of Bhutan (2002-07)The plan was launched on 1st July 2002 with the major development objectives as improving thequality of life especially of the poor, ensuring good governance, promoting private sector growthand employment generation, preserving and promoting cultural heritage and environmentalconservation, and achieving rapid economic growth and transformation.

Emphasis has been placed on strengthening the infrastructure, improving the quality of socialservices, preserving and promoting culture and environment. A special mention needs to be made tothe decentralization programme under which all development plans are to be framed at the local levelwith local communities determining plan priorities and strategies. Government has approved theestablishment of industrial estates; FDI policy has been adopted allowing foreigners to own up to 70per cent joint venture companies. To strengthen the financial system new prudential regulationshave been introduced including risk weighted capital adequacy, professional requirements for appointees.

In case of the external sector the focus is on to expand the existing sub-regional economiccooperation in order to expand the economic resource base and to diversify exports; and rationalizethe import tariff structure and export duties.

Box 2.1 continued


as the pace of reform a country levelapproach is called for.

BangladeshPolicy reforms in Bangladesh, whichhad its beginning in the 1980s,accelerated in the 1990s. ThoughBangladesh, being a least developedcountry, was exempted in the UruguayRound Agreements from makingcommitments regarding tariff reduction,rationalisation of the tariff structure hasbeen one of the key elements of tradepolicy reforms in Bangladesh. Prior to1986, there were 24 tariff slabs, whichhave been rationalised to 12 by 1993-94; 6 by 1996-97; and 4 by 1999-00.Preferential rates of duties applicableto public sector enterprise wereeliminated in 1989. As a part of therationalisation measures, the maximumtariff rate was reduced from a level of350 per cent in 1991-92 to 50 per centin 1995-96, 42.5 per cent in 1997-98and further down to 37.5 per cent in1999-00. As a result, the averagenominal protection fell from 89 per centin 1990-91 to 25 per cent in 1995-96and further down to 17 per cent in 2003.In 2002, the government also replacedthe national Security Levy (NSL) andthe Goods and Services Tax (GST) onimports with VAT at the general rate of20 per cent.1

To enhance export competitive-ness, Bangladesh shifted from a fixedexchange rate regime to a ‘managed’system of floating exchange rate in1979. In 1996-97, the Bangladeshgovernment accepted the conditions ofArticle VIII of IMF by making the Takafully convertible for current accounttransactions. In addition to tradeliberalization, FDI inflows wereencouraged by setting up specialeconomic zones. In 1989, a Board ofInvestment was established inBangladesh to encourage foreigninvestment. The foreign investmentpolicy was revised in 1991 and itremoved the limit on foreign equityparticipation and obligation for jointventure or ban on fully owned foreign

Emphasis was also placed on the development of the energy and power sector, construction andtransport (the primary drivers of growth), etc. as a means of providing employment to 70000individuals. But since this may not suffice, the role of the private sector has also been given attention.

Rural infrastructure and wider coverage of social services form an essential element todecrease rural poverty.Tenth Five Year Plan of India (2002-07)India’s 10th Five Year Plan (2002-07) aims at achieving a growth rate of 8 per cent especially inthe employment intensive areas to ensure rapid and well-distributed growth of income to sustainthe pace of poverty reduction accomplished over the past decade.

To attain these objectives two strategies are proposed: broad development targets be brokendown into state level targets to arrest regional imbalances and emphasis is being laid on theagricultural and employment generating sectors ensuring equity in quality of growth.The key to the formulation of the plan lies in the clear demarcation between the ‘income poverty’and ‘human poverty’. The text suggests that human well being should not be restricted to consumptionof goods and services alone but should also include in its ambit the provision of basic materialrequirements for all sections especially the provision of social services like health and education. Inthe social sector, some specific monitorable targets are listed as follows:

Reduce poverty by 5 per cent by the end of the plan;provide gainful employment to the additional workforce;all children should be in school by 2003;decreasing the gender gaps in literacy and wages by 50 per cent and increase literacy to 75 percent;decrease population rate of growth to 16.2 per cent by 2011. Reduce the maternal and infantmortality rates; andlay stress on afforestation and cleaning rivers to increase the supply of potable water.Creation of infrastructure and upgradation of the existing infrastructure is also an important

issue where special emphasis is being laid on the power sector in terms of cost recovery andfinancial viability.Tenth Plan of Nepal (2003-07)The main goal of the plan is to bring about a substantial, positive and sustainable change in theliving standards of Nepalese people. To achieve, this four main strategies are being adopted:

High, sustainable and broad based economic growth with the aim of resurgence of broad-basedeconomic activities. This will be centered around the following:

Agriculture development, sustainable management of natural resources and biodiversity.– Growth of agricultural productivity– Food production– High value horticulture– Animal related production, fish production– Agricultural technologyDevelopment of tourism, water resources, information technology, industry andcommerce sector with an important role for private sector.– Growth in productivity and income in industry and commerce– Export orientation– Industrial restructuring and trade promotion– Employment generation– Growth of tourismDevelopment and expansion of private sectorDevelopment of infrastructure at national and local levels.

Social sector and infrastructure developmentHuman resources development and women empowerment– Promotion of education at all levels– Enhancement in quality of health servicesDevelopment of rural infrastructures and rural energyPopulation management, social services and basic social securityInnovation of rural technology and appropriate use of existing technologyEnvironmental conservation.

Use of targeted programmes for enhancement of productive capacity of marginalized, deprived,and ignored, remote, weak and alienated communities and regions in a sustainable way. Thiswill include emphasis on employment, self-employment and empowerment of the underprivileged.Good governance that will require the establishment of transparency, accountability, multi-faceted decision process and decentralization, which will aid the process of nationaldevelopment.

Sources: RIS based on 1. Royal Government of Bhutan, Ninth Plan Report presented to the 80th Sessionof the National Assembly, Planning Commission.

2. Government of India, 2002, Tenth Five Year Plan; 2002-2007, New Delhi, Planning Commission.3. Government of Nepal, The Tenth Plan, Planning Commission.

Box 2.1 continued

Reforms and Global Economic Integration of South Asia


companies to sell shares through publicissues. In addition, the 1991 policyallowed foreign investment throughworking capital loans equivalent to theforeign equity amount and participationof foreign investors in stock exchanges,formulated rules for IPR protection, andexempted tax on royalties, technicalknow-how, interest and capital gains.

In early 2002, in the context ofdeclining foreign exchange reserves toa level of $ 1.1 billion (just sufficientfor 1.5 months imports) Taka wasdevalued by 1.6 per cent against dollarand regulatory duties on non-essentialimports were imposed. Since thesesteps were not in conformity with theearlier reform measures, all suchrestrictions were withdrawn in 2003and further reforms in the import dutystructure implemented.

At present, the major elements ofthe trade policy, among others, are:(a) Liberalized import and import

procedures with no need oflicensing.

(b) Rationalisation of the tariff structurewith a maximum rate of 37.5 percent import duty in 1999-2000.

(c) Reduction in quantitativerestrictions (QRs.), the coverage ofwhich has been reduced from 42per cent in 1985 to only 2 per centper cent of imports in 1996.

(d) The exchange rate policy regime ismore unified, flexible and market-based. Local currency Taka isfreely convertible for currentaccount transactions.

(e) IMF consistent counter trade/Special Trading Arrangements areallowed.

(f) Export promotion measures arespecific and transparent.

Reforms also aimed at making useof market based instruments to manageliquidity and bring about a more realisticinterest rate. In 2001, to encouragelending to the private sector, the centralbank reduced the bank rate from 7 percent to 6 per cent. In 2002 thegovernment made it mandatory for the

commercial banks to meet their cashreserve ratio only through local currencyand not through their foreign currencybalances as the later weakens monetarycontrol. Government also undertookmeasures to tighten budgetary disciplineand set up a Public Expenditure ReviewCommission and a Revenue ReformCommission in 2002.

BhutanDuring 1990s a series of structuralreform measures were initiated toenhance growth and increase privatesector participation in economicactivity. The privatisation programmeis progressing steadily and the legalsupport for the financial system isbeing strengthened. Personal incometax was introduced in 2001 as a firststep to strengthen the tax structureand diversify government revenue,which continues to be heavily relianton the production and exports ofelectricity. The monetary authoritiesare taking steps to increase theflexibility of financial institutions insetting their interest rates, to promotecompetition in the financial sector andto encourage private investments.Bhutan decided to join WTO andhopes to complete the process ofaccession by 2007. The governmentis gearing up for the necessarylegislative and regulatory changes ina phased manner to comply with WTOrequirements.2

The reporting period witnessed thelaunching of the ninth five year plan(2002-2007) which emphasised buildingup of infrastructure, improving thequality of life and at the same timepreserving the culture and environment.A characteristic feature of ninth five-year plan is its emphasis ondecentralisation programme wherein allthe development projects are to beconceived and implemented at the locallevel with greater participation of localcommunities.

In 2002 the Government adopted aliberal FDI policy, which allows foreigncompanies to own up to 70 per cent

of joint ventures, and specified aminimum investment of $ 1 million inmanufacturing sector projects and $0.5 million in the case of service sectorinvestment. Along with liberalizing theFDI policy regime in 2003 governmentannounced various tax incentives witha view to promote export and generateadditional employment opportunities.The trade regime has beenstrengthened by rationalisation ofimport tariffs and export duties. Tostrengthen the financial system newprudential regulations have beenintroduced which include risk-weighted capital adequacyrequirement, rules specifying thequalification of directors of financialinstitutions and regulations forpreventing the interlocking ofmembership of the boards of directors.3

IndiaWhile the move towards a more openand market oriented economy could betraced back to the mid-1980s, acomprehensive package of reformscovering trade, industrial and exchangerate policy regimes had to wait till theearly years of 1990s. The policyreforms pertaining to the external sectorincluded, but not limited to, dismantlingof the import licensing system, phasingout of almost all of the non-tariffbarriers (NTBs) except for consumergoods in early years of 1990s and thatof quantitative restrictions (QRs) byMarch 2001 - two years ahead of theoriginal WTO schedule. The QRs onimports of around 2300 items fromSAARC countries had been removedunilaterally in 1998. The peak tariff rateshave been brought down to a maximumof 50 per cent from upto 355 per centand average weighted tariff rates havecome down from 87 per cent to just 20per cent by 1999. Tariff rates on mostof the commodities had been broughtwell below the bound rates by 1998/99except for 40 commodities.

More recently, policy measuresannounced in the Union Budget 2002-03 entailed a reduction in peak customs



duty from 35 per cent to 30 per centand also provided an indication offurther reductions/rationalisation inthese duties into only two slabs of 10per cent (for raw material, intermediateand components) and 20 per cent (forfinal products) by 2004-05.4

Furthermore, trade liberalization andpromotion measures included removalof Quantitative Restrictions (QRs) onBalance-of-Payments (BOPs) groundsby dismantling restrictions on theremaining 715 items. Agri-economicZones were set up for promotingagricultural exports on the basis ofspecific products and geographicalareas.

The reform package of 1991 alsocovered a far-reaching liberalization ofindustrial policy. The New IndustrialPolicy (NIP) accords a highly liberalattitude to foreign direct investments(FDI) than ever. For speedy clearanceof FDI proposals the policy allowed foran automatic approval system subjectto the fulfilling of specified equitynorms. A Foreign InvestmentPromotion Board (FIPB) has been setup to consider all other proposals thatdo not qualify for automatic clearance.For investment facilitation, ForeignInvestment Implementation Agencywas set up in 2001. Foreign ownershipupto 100 per cent is permitted in mostmanufacturing sectors – in some sectorseven on automatic basis. The dividendbalancing requirement imposed on 22consumer goods was also withdrawnin 2000. The policy governing outwardFDI has also been liberalized. Therevised guidelines, amended in 2002,provide for automatic approval ofoutward FDI proposals by Indiancompanies to the extent of US $ 100million.5 A Competition Act was passedin 2002 and a Competition Commissionhas also been set up. A phasedprogramme of disinvestment of publicownership in public sector corporationshas been launched.

In 2001 government announced acomprehensive programme of second-generation reforms mainly aimed at

fiscal consolidation. This amounted toa two prolonged approach comprisingboth revenue generating measures likea 5 per cent surcharge on all tax paidand expenditure management measureslike containing growth in public sectoremployment and reduction in subsidies.The 2001 budget also introducedmeasures to link administered interestrates to the market rate of interest ongovernment securities of equalmaturities with a view to bring downthe overall level of interest rates in theeconomy. The financial sector reformsin the year 2001 also focused onstrengthening the banking and non-banking sector. This called forupgrading norms for capital adequacy,income recognition provisioning forNon- Performing Assets (NPAs),disclosures and transparency inaccounting and risk management

In 2003 the government consideredthe wide ranging recommendation madeby the Task Forces on direct andindirect taxes and began a phasedimplementation of some of theproposals starting with a major reformof tax administration - both direct andindirect taxes. An important expenditureconsolidation measure has been the debtrestructuring announced in 2003 budget.This involved an early repayment of allhigh interest public debt. About $3billion external debt to AsianDevelopment Bank (ADB) and theWorld Bank has also been repaid.Government also announced a $21billion debt swap scheme for the statesto restructure the debt to the centralgovernment. This implies that the statescould now borrow from the market atthe low rate of interest to repay the highcost debt to the central government.These measures are expected to have asignificant impact in terms of reducingthe debt burden of the government.

MaldivesThe Maldivian Government began aneconomic reform programme in 1989initially by lifting import quotas andopening some exports to the private

sector.6 Subsequently, it has liberalizedregulations to allow more foreigninvestment. On account of theconstraints set by the limited availabilityof cultivable land and the shortage ofdomestic labour, agriculture andmanufacturing play only a minor role inthe economy. In the exchange rate frontRufiyaar, pegged to the dollar under adefacto fixed exchange rate policy, wasdevalued in 2001 by about 8 per cent.This has been induced by stress in theforeign exchange market on account ofa premium of about 10 per cent in theparallel market over the official exchangerate. The devaluation has had the effectof almost totally eliminating the parallelmarket.

There is an interesting dilemmaprevailing in Maldives not only in therealm of trade policy reforms but interms of a general approach towardsshedding its LDC status (Box 2.2).While graduation from the LDC is anindicator of development, this is alsoperceived as foregoing some of thespecial preferences that the country hasbeen able to enjoy so far.

In the context of deteriorating fiscalbalance the government is in the processof initiating a new public accountingsystem with a view to have morecomprehensive and updated control overpublic expenditure. In addition, thegovernment is in the process ofintroducing a new tax regime to expandthe tax base. In the context of financialconstrains faced by the private sector,government permitted foreign banks likeHSBC to enter the local market. Alsokeeping in view of the long termdevelopment of the financial sector, astock-trading floor was opened in 2002.All these initiatives, including therationalisation of interest rates initiated in2001, are expected to take a long waytowards the development of the financialsector in the country.

NepalSimilar to other South Asian economies,Nepal also opened up its economy inthe early 1990s with the adoption of



reforms. The reform measures havesince covered almost all sectors of theeconomy including trade andinvestment, fiscal and monetarypolicies, financial and capital marketsand other economic and socialsectors.7 The import licensing systemand quantitative restrictions wereeliminated and tariff rates andstructure were reduced andrationalised to make the trade sectorcompetitive. The average rate ofprotection has declined from about 111per cent in 1989 to 22 per cent in 1993

and to 14.7 per cent in 2000. Additionalmeasures initiated to promoteinternational trade include theintroduction of a bonded warehouse,duty-drawback scheme, initiation of themulti-modal facility (dry port) and anexport-processing zone. Until 2002Nepal had no restrictive import taxesother than custom duties. In 2002 asecurity tax was introduced on importsto help financing extra governmentexpenditure resulting from the domesticconflict between the government andMaoist Guerillas.

Nepal’s trade reform programmewas complemented by the bilateral trade-treaty signed with India in 1996, whichallows Nepal to export manufacturedproducts to India free of customs dutyand quantitative restrictions. Similarly,in order to improve the environment forinvestment, the Industrial Enterprise Act(1992) and the Transfer of TechnologyAct (1992) were enacted in line withthe open, liberal and market-orientedpolicy. Financial sector reforms havealso been carried out to support thetrade and industrial reforms. Interestrates were deregulated and joint-venturebanks were allowed to open up. Nepalalso introduced full convertibility of theNepalese rupees on the current account.In addition, various sectoral strategieshave been introduced to attractinvestment. For example, theHydropower Policy (1992) has openedup new avenues to develop thehydropower of the country bymotivating national and foreign privateinvestors in this sector. The liberalizedaviation policy has helped the tourismindustry significantly. Road, airportconstruction and telecommunicationservices have also been opened to theprivate sector to attract more domesticas well as foreign investments and toimprove service delivery. Nepal wasadmitted to WTO at the CancunMinisterial Conference in September2003 upon successful completion of allthe conditions.

Recent reforms in the monetarysector included the enactment of NepalRastra Bank Act in 2002 granting CentralBank greater autonomy. Anotherimportant development related to therestructuring plan for the two largeststate-owned commercial banks RastriyaBaniya Bank and Nepal Bank Limited.Reforms in the governance frontincluded installation of the computerisedcivil service personal informationsystem in 2002 to improveaccountability and transparency of theservice and the elimination 7500 outof 17500 vacant posts. The 10th plan(2003-07) aims at reducing poverty

Box 2.2: Graduation of Maldives from LDC status

One of the Maldivian Government’s major concerns with LDC graduation is the adverseimpact it may have on the country’s preferential access of certain exports to key developedmarkets. On graduation, the main exports likely to be affected would be fish to the EU and toSri Lanka. Its other main merchandise export, clothing, would be largely unaffected.

The share of Maldivian exports, most notably canned and some fresh fish, to the preferentialEU market has fallen substantially from 21 per cent in 1997 to 12 per cent in 2001. Graduationfrom LDC status would make these fish products ineligible for GSP treatment and subject toMFN tariffs, of up to 24 per cent. Clothing exports would not be affected because, unlike fish,they do not satisfy the EU’s rules of origin for preferential access. While non-preferentialclothing exports to the EU have shown little growth and account for less than 10 per cent oftotal exports to the EU, they have grown strongly to the United States. Clothing exports to theUnited States and EU are not subject to quotas, regardless of development status.

Graduation would also remove preferences under SAPTA whereby additional tariff marginsof preference are provided for certain products imported from LDC members. Imports ofdried fish by Sri Lanka have grown substantially under these arrangements. The margin ofpreference on such imports is 35 per cent. The Maldives would lose the entire margin on fishexports following graduation. The share of the Maldives’ fish exports sold under SAARCpreferences, mainly dried fish to Sri Lanka, has increased substantially: they accounted for 4per cent of total fish exports in 1997, while in 2001 the share was 30 per cent. Clothing exportsto SAARC members would be unaffected as no member provides preferences on these products.The Maldives would lose access to more generous rules of origin extended by SAARC countriesto LDC members.

Fish exports, especially of canned tuna to the EU, would be hit hardest by graduation.Canned exports involve the highest degree of processing, receive large preferences and areexported to no other market. However, sole reliance on this market, and the difficulties facedby Maldivian fish products competing in the EU with other suppliers, including MFN dutiableimports, such as from Thailand, raises serious questions about the economic efficiency of thisactivity for the Maldives. If fish canning is not internationally efficient, these resources couldbe used more efficiently in alternative activities. Access to LDC preferences in the EU marketis unlikely to prevent Maldivian canned fish exports from being displaced by other morecompetitive suppliers in the longer run, unless the industry’s efficiency is improved significantly.Continuing to shelter these exports from world competition in the preferential EU market andin the home market, by tariffs and other protectionist measures, is unlikely to help the industryachieve these efficiency gains. The progressive relaxation and recent termination, in 2000, ofthe stateowned MIFCO’s tuna export monopoly at national level were important but incompletesteps towards improving efficiency by injecting greater competition among processors.

LDC graduation would put the Maldives at a disadvantage in the EU market for fishproducts compared with ACP non-LDC developing countries, such as Papua New Guinea andFiji, which could continue to export fish products duty free to the EU under the CotonouAgreement.

Source: WTO Secretariat, Trade Policy Review, 2003.



level from 38 per cent to 30 per centby 2007. The plan focuses on broad-based and sustainable developmentwith focus on social sector andtargeted programme for the poor anddisadvantaged.8

PakistanThe reform measures of the 1990scontinued in the early years of newmillennium as manifested in the tradeand tariff reforms wherein maximumtariffs were reduced from 35 per centto 30 per cent.9 The average tariff ratedeclined from over 50 per cent in 1995to 20.6 per cent in 2001 and furtherdeclined to 18.2 per cent in 2002-03.Decision has also been made to phaseout quantitative restrictions on textileimports (see Box 2.3).

The salient features of the existingtrade policy are summarised below:10

Freight subsidy up to 25 per centfor new products and new markets.Registration requirement forexporters and importers has beenwaived and monetary limits onexports of samples enhanced from$ 5,000 to $ 10,000.Export of wheat and its millingproducts has been allowed.Import duty of 15 per cent onimport of finished leather has beenabolished to facilitate leatherexports.

To make export of gems andjewellery easier, the condition ofpurchase up to $ 10,000 andprovision of encashment certificatehas been removed, as well as valueaddition requirement of export ofbangles reduced to 5 per cent. Export of old machinery allowedsubject to no refund of import leviesor duty drawback.Amount of security deposit withExport Promotion Bureau forexport of cotton reduced from 3per cent to 2 per cent.Pakistan Export Finance GuaranteeAgency has been set up in theprivate sector to facilitate SMEs toaccess financing for workingcapital.The maximum tariff rate has beenbrought down to 25 per cent andthe number of tariff slabs have beenreduced from 5 to 4.Industrial consumers have beenallowed to import machinery andparts up to value of $ 30,000against bank draft without openingof letter of credit.In December 2001 IMF approved

a three year arrangement for Pakistanunder the Poverty Reduction andGrowth Facility (PRGF) of about $1.32million. As part of PRGF conditionalitiesthe government is expected to reducethe budget deficit to 3.2 per cent of GDP

by 2004 in addition to implementationof key sector and governance relatedreforms. The year 2003 was markedby major reforms on the fiscal front.The reforms aimed at (a)simplification of the tax regime, bygradually eliminating with holdingtaxes and reducing a number ofstatutory regulatory orders; (b)reform of income tax; (c) expansionof the general sales tax base; and (d)continuation of trade reform throughtariff reduction.

Government also undertook a seriesof banking sector reforms which aimedat improving corporate governancethrough implementation of directives toregulate appointment of board membersand chief executive officers ofcommercial banks as well as morestringent review of audit procedures.Moreover, the minimum paid upcapital requirement of banks has beenraised from PRs 500 million to PRsone billion. At the instance of theSecurities and Exchange Commissionof Pakistan various measures wereundertaken to reform the stockmarket. The Board of Directors wasreconstituted to include directorsnominated by the commission,prescriptions of adequate capital basefor each brokerage house, permissionfor future trading in selected shares,prescription of the code of corporategovernance for listed companies aresome of the important ones to bementioned. Privatisation also pickedup momentum in 2002 with one of thenationalised commercial banks (UnitedBank Limited) was privatised inSeptember 2002. Also about 20 percent of government’s stake in theNational Bank of Pakistan was divestedthrough stock market. Government alsoset up the Oil and Gas RegulatoryAuthority in 2002 to encouragecompetition and private sector growthin the oil and gas sector.11

The period also witnessed thecontinuation of the reforms in trade andinvestment policies with focus on doingaway with anti export bias by trade and

Box 2.3: Import Policies of Pakistan

The Pakistani Government has committed itself to liberalize further its trade regime aspresented in its IMF/World Bank Policy framework paper of December 1998. Consistent withthis commitment, on June 30, 2002, the maximum import tariff was reduced from 30 per centto 25 per cent. The government established three tariff categories with duty rates of 25 percent, 15 per cent, and 5 per cent. The tariff on most consumer goods was reduced to 25 percent, for most intermediate goods to 10 per cent, and for most raw materials to 5 per cent.

In November 2000, following a delay of several years, Pakistan reached an agreement withthe WTO Balance of Payments Committee to phase out quantitative restrictions on textileimports. The government removed all textile products from its “negative list,” including wovencotton fabrics, woven synthetic fabrics, bed linens, curtains, certain knitted fabrics and apparelitems, tents, carpets and textile floor coverings. Many of these items are key Pakistani exportproducts. All textile products can now be imported into Pakistan. However, Pakistan’s tradepolicy in 2002 continued to ban the import of 30 items, mostly on religious, environmental,security, and health grounds. Automobiles continue to face high duties ranging between 80 percent and 200 per cent.

Source: http://www.ustr.gov/reports/nte/2003/pakistan.pdf.



tariff liberalization. Also there was a cutin the number of statutory regulatoryorders governing tariff exemptions.Further procedural requirements forimports and exports were minimisedwith a view to facilitate trade.

Sri LankaIn Sri Lanka, two phases ofliberalization are noticeable.12 The firstround of reforms carried out during1977-89, replaced QRs on tradeableswith revised tariff structure andprovided incentives for non-traditionalexports. Apart from realignment ofexchange rates, the reforms includeddevaluation of the currency to more than100 per cent in nominal terms. Thesecond phase of reforms during the1990s included further tariff cuts andsimplification, removal of exchangecontrols on current accounttransactions and flexible exchange rates.

In Sri Lanka also the focus of thereforms in the last two years seems tohave been on achieving fiscal prudenceand containing budget deficit. TheBudget 2001 aimed at reducing theoverall deficit, excluding grants andprivatisation proceeds, to 8.5 per centof the GDP from about 10 per cent in2001. The Budget 2002 also focusedon stabilisation through fiscalconsolidation. With a view to containdeficit, wide ranging changes were madeto simplify tax administration and widenthe tax base. However, on account ofthe slow growth in trade there was ashort-fall in customs receipts. This hasforced the government to resolve theexpenditure cut to keep the deficit undercontrol. The 2003 budget aimed atreducing the deficit further to 7.5 percent of the GDP from 9 per cent in theprevious year. To address the issue ofunder-utilisation of foreign aid in 2002the government introduced a ‘PoolFund’ for capital expenditure throughwhich projects that disbursed morequickly than expected could draw onthese counterparts funds without havingto wait for a supplementary budgetpassed by Parliament.

Since the floating of Sri Lankanrupee in 2001, substantial foreignreserves have been accumulated boththrough official sources such as IMFand direct purchases from foreignexchange market. This has enabled thegovernment to relax the restrictions onforeign exchange transactions. With aview to avail IMF assistance underPoverty Reduction and Growth Facility(PRGF), the government has preparedits poverty reduction strategy paper inconsultation with differentstakeholders. The PRGF is expectedfocus on structural reform in labour andfinancial market.

2.3 Reforms and GlobalEconomic IntegrationOn the whole, the foregoing discussionsuggests that all the countries in SouthAsia have undertaken unprecedentedreform initiatives during past decade. Ageneral trend appears to be one whereinthe focus of reforms has been on theexternal sector. The process of openingup of the economies seems to have

accelerated momentum as the UruguayRound of negotiations placed substantialobligations which, inter alia, includedliberalization of their trade regime withthe hope of getting increased access tothe developed country market.13 Theextent of such liberalization is evidentfrom the reduction in tariff rate overthe years across all the countries in theregion (see Fig. 2.1).

The dismantling of restrictions ontrade has had the effect of greaterintegration of the South Asianeconomies with the world market. Thisis manifested in an unprecedentedincrease in the trade-GDP ratio of allthe countries in the region. Table 2.1and Fig. 2.2 shows that the trade GDPratio has increased in all the countriesand the highest increase has been in thecase of India wherein it more thandoubled to reach a level of nearly 30per cent in 2000-01. At the same time itis also to be noted that India markslowest trade GDP ratio in the regiongiven its large domestic market (see Fig2.2).

Figure 2.1: Unweighted Average Tariff Rates in South Asian Countries

0

20

40

60

80

100

2001199519911986

Sri LankaPakistanNepalMaldivesIndiaBhutanBangladesh

Table 2.1: Proportion of Trade in GDP of South Asian Countries(in per cent)

Country Bangladesh Bhutan India Maldives Nepal Pakistan Sri LankaYear

1985-87 24.26 61.52 14.08 60.26 31.91 34.01 61.871990-92 19.83 75.05 18.78 88.51* 36.28 37.45 68.421996-98 30.47 76.15 25.45 167.08 59.59 36.40 79.172000-01 35.50 89.47* 29.79 168.94 55.06 35.84 85.42

Source: RIS estimates based on WDI CD-ROM, 2003.Note: * indicates the figure of the year 2000 and 1990 respectively for Bhutan and Maldives.


Source: RIS, based on WDI CD-ROM, 2003.


2.4 Concluding RemarksThis chapter has overviewed thepatterns of economic reforms in theSouth Asian economies to provide abackground to the analysis of economicperformance attempted in the laterchapters. The discussion suggests thatin all the South Asian countries theprocess of reforms, started in the early1990s, has been carried forward to thenew millennium. As a result, the SouthAsian economies in 2004 are muchmore open and deeply integrated withthe world economy.

The available evidence alsosuggests that the focus of reforminitiatives in the recent years has beenmore on domestic sectors of theeconomies which aimed at, doing awaywith traditional state-monopolies,bringing about greater competition in thedomestic economy and fiscalconsolidation. What has been the returnto these reform initiatives, especially interms of bringing about the muchneeded growth and structuraltransformation along with internationalcompetitiveness and quality of life ofthe people? Subsequent chapters of the

Figure 2.2: Trade to GDP Ratio in South Asian Countries

0

20

40

60

80

100

120

140

160

1802000-011996-981990-921985-87


report is an attempt to seek answers tothese and other related issues.

Endnotes1 Dhaka Chamber of Commerce and Industry,

2003.2 Bhutan, Ministry of Finance, 2001.3 Based on ADB, 2003.4 Government of India, 2003.5 See for more details Nagesh Kumar, 2003.6 see http://www.cia.gov/cia/publications/

factbook/geos/mv.html#Econ.7 Based on Nepal, National Planning

Commission, 2001.8 See Box 2.1.9 For an account of the reform measures

undertaken in the 1990s see RIS, 2002.10 Ministry of Finance, Government of

Pakistan, 2003.11 Based on ADB, 2003 and Government of

Pakistan, Ministry of Finance, EconomicSurvey, 2002-03.

12 Based on Athukorala and Rajapatirana,2000.

13 RIS, 2003.

ReferencesADB. 2003. Asian Development Outlook 2003.

Hong Kong: Oxford University Press.Athukorala, P. and S. Rajapatirana. 2000.

Liberalization and IndustrialTransformation . Delhi: OxfordUniversity Press.

Bhutan, Ministry of Finance. 2001. ActionProgramme for the Development ofBhutan, 2001-2010. CountryPresentation of the Royal Governmentof Bhutan at the Third UN Conferenceon the Least Developed Countries.Brussels. 14-20 May.

Dhaka Chamber of Commerce and Industry.2003. http://www.dhakachamber.com.

Government of India. 2002. Tenth Five YearPlan; 2002-2007. New Delhi: PlanningCommission.

Government of India. 2003. Economic Survey2002-03. New Delhi: Ministry ofFinance.

Government of Nepal. The Tenth Plan.Planning Commission.

Government of Pakistan. Economic Survey2002-03. Ministry of Finance.

Kumar, N. 2003. “Liberalization, ForeignDirect Investment Flows and EconomicDevelopment: The Indian Experience inthe 1990s”. RIS Discussion Paper No.64. New Delhi: Research and InformationSystem for the Non-Aligned and OtherDeveloping Countries.

Nepal, National Planning Commission. 2001.Nepal: Country Assessment andProgramme of Action for 2001-2010.Report for the Third UN Conference onLeast Developed Countries, Brussels,May 14-21.

RIS. 2002. South Asia Development andCooperation Report 2001/02, NewDelhi. Research and Information Systemfor the Non-Aligned and OtherDeveloping Countries.

RIS. 2003. World Trade and DevelopmentReport 2003: Cancun and Beyond. NewDelhi: Academic Foundation forResearch and Information System forthe Non-Aligned and Other DevelopingCountries.

Royal Government of Bhutan. Ninth PlanReport presented to the 80th Sessionof the National Assembly, PlanningCommission.

The World Bank. 2003. World DevelopmentIndicators, 2003, CDROM.


Source: RIS, based on WDI CD-ROM, 2003.


3.1 Introduction

As observed earlier, the South Asianeconomies have embarked upon

major reform initiatives during the lasttwelve years. The reforms, whichbegan with the external sector duringthe early 1990s, slowly but steadilyspread over to domestic sectors in thelater years with greater focus onstabilization and fiscal prudence.Against this background the presentchapter examines the trends andpatterns in growth and structuralchange in South Asian economies. ThisChapter begins with an exploration ofthe overall growth trends in the regionand individual economies (Section 2).

Third section examines theperformance of three broad sectors ofthese economies namely agriculture(primary sector), industry (secondarysector) and services (tertiary sector).Effects of economic reforms in termsof structural changes are the focus ofdiscussion in Section 4. Final sectionsums up the discussion and delvesupon the outlook for the near future.

3.2 Growth Performance overthe Past Decade and OutlookAfter growing at a robust rate of 7.1per cent on an average per year duringthe period 1994/95 to 1996/97, thegrowth rates of South Asian economiesin the last three years of the 1990s i.e.

1997 to 2000 declined to 5.2 per cent(see Table 3.1 and Figure 3.1). Thedecline in growth performance of SouthAsian economies in these years was dueto the adverse effect of the East Asianfinancial crisis and partly due toslackening of industrial growth resultingfrom fiscal tightening. In the years 2001/02 and 2002/03 the growthperformance of the region deterioratedfurther to 4.6 per cent because of theslow down of the world economyparticularly in the United States, a majormarket for exports of the region andadverse weather conditions in countrieslike India, Bangladesh and Nepal whichaffected the agricultural output.Agricultural growth rates in the region

Macroeconomic Performanceand Outlook of South Asia:Growth, Structural Transformation and Stabilization

3

Table 3.1: Growth Rates of GDP in South Asian Countries

Annual averages

1994/ 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ 2004/ 1994-97 1997-01 2001-0395 96 97 98 99 00 01 02 03 04P 05P

Bangladesh 4.2 4.9 4.6 5.4 5.2 4.9 5.9 5.3 4.4 5.5 5.9 4.6 5.4 4.9Bhutan 6.4 7.4 5.2 7.2 6.4 7.6 5.3 6.6 7.7 7.8 7.9 6.3 6.6 7.2India 7.8 7.3 8.0 4.8 6.5 6.1 4.4 5.6 4.3 7.2 7.8 7.7 5.5 5.0Maldives 6.6 7.2 9.1 10.4 9.8 7.2 4.8 3.4 6.0 4.3 3.0 7.6 8.1 4.7Nepal 8.2 2.9 5.6 5.1 3.2 4.5 6.0 4.6 -0.5 4.2 4.5 5.6 4.7 2.1Pakistan 3.9 5.2 6.8 1.7 3.5 4.2 3.9 2.2 3.4 5.5 5.7 5.3 3.3 2.8Sri Lanka 5.6 5.5 3.3 6.3 4.7 4.3 6.0 -1.5 4 5.1 5.8 4.8 5.3 1.3South Asia 7.0 6.8 7.5 4.5 6.0 5.7 4.5 5 4.2 6.9 7.2 7.1 5.2 4.6

Source: RIS based on ADB and IMF Data.Note: p represents RIS projections.



have also been affected by decliningcommodity prices in internationalmarkets (see Box 3.1). The overallgrowth performance was alsosignificantly affected by continuedindustrial recession, rising oil prices,which in turn were provoked by to 9/11 and related events such as the Afghanwar, among other factors.

The region’s economy is expected toturn corner in the year 2003/04 to achievea growth rate of 6.9 per cent and improveits performance further to 7.2 per cent in2004/05. The recovery in 2003 has beenassisted by industrial recovery in India,Pakistan and other countries on accountof good mansoon and healthy agriculturalgrowth. The recovery of the worldeconomy is also likely to help inreinforcing the spurt in growth.

Table 3.1 also shows considerablevariation in the past performance andoutlook across countries. In whatfollows, the growth performance andoutlook in individual South Asiancountries are reviewed.

3.3 Growth Outlook AcrossCountriesBangladesh was able to improve itsgrowth performance on account of thebetter performance of both agricultureand industrial sectors even during theyears of the East Asian financial crisis.The overall GDP growth at 5.9 per centin 2000 was robust. The global

Figure 3.1: Growth Rates of South Asian Economies 1994-2004

Macroeconomic Performance and Outlook of South Asia

Bhutan from the adverse effects ofslowdown of the global economy in2001. Construction of hydro-powerplants and power exports to Indiaremained the key factor in Bhutan’sGDP growth in the recent years.1 Theprudent macro economic managementover the years also contributed towardsthe rapid growth of the economy.

With the current high non-inflationary GDP growth, the short-termoutlook is upbeat with projected growthrates of 7.8 and 7.9 per cent for 2003and 2004 respectively.

India’s growth performance duringthe late 1990s suffered after a robust7.7 per cent growth averaged during1994-96. Besides crisis in the East Asiancountries which have emerged asimportant trade partners of India,India’s growth performance during late1990s also suffered due to a deepeningindustrial recession. The industrialrecession was provoked by decliningpublic investment resulting from fiscalsqueeze. In the years 2001/02 and 2002/03, the slowdown of the US economyadversely affected the demand for exportsof IT software industry among otherproducts. The poor monsoon and risingoil prices in the wake of September 11and Afghan War further compounded thesituation. Despite these adverse factors,the Indian economy was able to growat an average rate of 5 per cent duringthese two years compared to 5.5averaged during 1997-2000.

With rapid growth in exports,particularly in the service sector, andcapital inflows, substantial foreignexchange reserves of US$ 100 billionhave accumulated. Despite the sharpappreciation of rupee in 2003, theexports are growing by about 10 percent. The outlook is bullish at 7.2 percent growth rate in 2003/04 and afurther improvement to 7.5 per cent in2004/05.

Maldives has been among the bestperforming economies in the region with8.1 per cent growth rate during to 1997-2001/02. However, the growth rateslowed down in the early years of the

0

2

4

6

8

10

12


2004p2003p200220012000199919981997199619951994

slowdown in 2001/02 and 2002/03leading to decline of exports andoverseas workers’ remittance has hadthe effect of reducing growth rates inthese years to 5.3 and 4.4 per cent,respectively. In addition to the externalfactors, internal factors like the stagnantagricultural output resulting fromadverse weather conditions, depressedwholesale and retail trade in turn due tosubdued level of export-orientedmanufacturing and transport andcommunication activities also seem tohave played their role.

With the sign of positivedevelopment in both domestic andexternal demand, the economy isexpected to pick up and hence theprojected growth rates for 2003/04 and2004/05 are 5.5 and 5.9 per cent,respectively. In 2003/04, exportperformance and workers’ remittanceare increasing with the recovery of theworld economy. The GDP growth islikely to pick up further in 2004/05 dueto a measured recovery in externaldemand particularly in the US and EU,and the pick up in the private sectoreconomic activity due to the progresswith the country’s structural andeconomic reforms.

Bhutan has consistently improvedits growth performance and achieved arobust growth rate of 7.2 per cent onaverage during 2001/02 and 2002/03.Deeper integration with India insulated


new millennium to 3.4 per cent in 2001/02 before recovering to 6 per cent in2002/03. A major contribution to thegrowth of the economy comes fromtourism industry. The tourism sector,which had shown annual growth ofabout 6 per cent in recent years, wasseriously affected to the extent of 50per cent in 2001 mainly due to theSeptember 11 events. The downturn ofthe sector had spillover effects on therest of the economy. Transport andcommunications, the second largestsector grew fairly strongly at 6.3 percent but even this was lower than thedouble-digit annual rates in the secondhalf of the last decade. Other sectors,including fisheries financial and businessservices, real estate, and retail tradewere weak and growing at 1 per centor less. The further liberalization offinancial sector and devaluation ofdomestic currency in 2001 might havestrengthened the external sector tosome extent. The weak performancecontinued in 2002 and beyond.

Progress in accelerating growth willdepend to some extent on developmentsin the global economy and on securityconditions in South Asia. Though thetourism remained weak in 2002, asignificant increase in the disbursementof official assistance was expected tohelp offset the weakening currentaccount. The gradual recovery intourism is expected to continue in 2003-04 due to a better world economicoutlook. The growth outlook in 2003/04 is put at 6.2 per cent.

Nepal experienced a very disturbinggrowth experience with its growth ratescoming down during the late 1990s andturning negative in 2002/03 for the firsttime in 20 years. In addition to theexternal factors, the internal factors likethe death of members of the royal familyin June 2001 and a rise in insurgencyalso contributed to the slow down.Tourism related services were hit by theescalating insurgency and the shockingcircumstances surrounding the deathsof royal family members. Tourismrecorded a 34 per cent decline in the

revenue in 2002. The overall growth fellalso due to decline in manufacturingactivity, sluggish development activitiesand low aid inflows.

Outlook for 2003/04 is expected tobe a cautious recovery to 4 per centwhich may further improve to 4.5 percent in 2004/05 depending upon politicalconditions and peace.

Pakistan’s growth performancehad suffered severely in 2001 and 2002an account of the severe drought thatcaused the agriculture sector tocontract, though the rest of theeconomy registered strong expansion.The output growth in 2001/02 fell to2.2 per cent from 3.9 per cent in 2000/

01. The overall growth has beenmaintained at 3.4 per cent in 2002/03as compared to 2.2 per cent in 2001/02, mainly on account of theperformance of non-agriculture GDPgrowth of 4.3 per cent in 2002/03 from3.1 per cent in the previous year. Betterperformance in 2002/03 has also beenattributed to improvement in the macroeconomic fundamentals achievedthrough stabilization policies pursueddespite the continuation of drought anddeteriorating external surroundings.

A current account surplus resultingfrom surging remittances from overseasPakistanis and booming exports thanksto preferential quota regimes offered by


Box 3.1: Declining Growth Rates of Agriculture:Role of Commodity Prices

All the countries in South Asia have seen a decline in their agricultural growth rate. To illustrate;the rate of growth of agricultural production in Pakistan declined from 4 per cent in the 1980sto 3.7 per cent during 1991-2002. Similarly in the case of India the decline was from 3.1 percent to 2.7 per cent. The situation was not much different in the case of Nepal and Sri Lankaeither. It appears that the decline was highest in the case of those countries, which are havingstrong export oriented agriculture. As is evident from (Box Fig 3.1) the period since mid 1990swas marked by a drastic decline in the price of most primary commodities. The magnitude ofdecline is evident from the fact that the price of most commodities in 2002 is much lower thantheir level in 1970. In the case of tropical beverages like tea and coffee, which are importantcrops in countries like Sri Lanka and India, the price decline has been much more drastic.

The observed performance of the agricultural sector therefore, cannot be de-linked fromthe less than friendly world market conditions that these countries were faced with during thelast decade especially since the formation of WTO. In the post Uruguay Round phase,developing countries have undertaken substantial commitments to provide of market access inagriculture (see RIS 2003). On the other hand, expanded access to market of industrializedcountries promised to developing countries after WTO under the Agreement of Agriculturehas failed to materialize. RIS (2003) shows that there have been tendencies to either underimplement the commitments or to implement them in a manner that makes the fruits ofliberalization unavailable to developing countries. The ‘dirty tariffication’ of non-tariff barriers,peak tariff rates applicable to agricultural commodities have led to very little market access ineffective terms, if at all Developed countries continue to provide substantial domestic supportto agricultural production along with considerable export subsidies.

Source: RIS.

50

100

150

200

250

Raw MaterialBeveragesAgriculture

20022001200019991998199719961995199019801970

Box Fig. 3.1 Trend in the Price Index ofPrimary Commodities (1990=100)


the US and EU have led to accumulationof forex reserves to nearly $12 billion.

The outlook for 2003/04 and 2004/05 suggests a turn around in growthrates to 5.3 per cent and to 5.5 per centrespectively.

Sri Lanka’s growth performancesharply deteriorated in 2001 to -1.5 percent from a healthy 5.3 per centaveraged during 1997-2001. This poorperformance was largely due to externalfactors with the slowdown in globalgrowth dampening for the country’smanufacturing exports, high oil pricesleading to increased cost of productionand shipping. The problems gotcompounded with a serious droughtlowering agricultural yields andhydropower generation. LTTE attack oncountry’s only international airport in 2001hampered the tourism; a hefty war riskinsurance surcharge on ships docking atthe country’s ports damaged the shippingindustry leading to contraction in GDPgrowth. The growth outlook for 2003/04 is likely to be an improvement over 4per cent recorded in 2002/03 to 5.1 percent and further to 5.8 per cent 2004/05 due to rising external demand fromindustrial countries and the recovery oftourism and shipping.

3.4 Structural Transformation:Service Sector Emerges as theKey Driver of GrowthMost of the South Asian economieshave traditionally been dominated by

agriculture or primary sector. The focusof the development strategy pursued bythe governments over the past fiftyyears has been to industrialize the

economies and reduce their dependenceon agriculture. As a result of thesepolicies the share of agriculture hascome down steadily over the period.Agriculture accounted for nearly 40 percent of South Asian GDP at the end ofthe 1970s and nearly 31 per cent evenat the end of 1980s. However, its sharehas come down to less than a quarterby 2002 (Table 3.2).

The share of agriculture hasdeclined in all the South Asiancountries. However, the extent ofdecline varied across countries.Agriculture now accounts for less thana quarter of GDP in all the South Asiancountries except for Bhutan andNepal. In Nepal and Bhutan too theshare has declined but still higher thana 25 per cent of the GDP.

Table 3.2: Sectoral Composition of Production in South Asia(as per cent of GDP)

Region Agriculture Industry Services

Country 1991 2002 1991 2002 1991 2002

South Asia 30.7 24.6 25.6 26.3 43.7 49.1Bangladesh 29.5 21.9 21.1 25.5 49.4 52.6Bhutan 43.1 33.9 25.0 37.4 32.9 31.6India 31.3 25.0 27.9 25.9 40.9 49.2Maldives 20.6 9.5 17.1 15.5 62.3 75.0Nepal 48.6 40.6 17.9 21.8 35.5 40.8Pakistan 25.7 24.2 25.8 22.4 48.6 53.4Sri Lanka 22.2 20.1 26.6 26.3 51.3 53.6

Source:RIS based on ADB, Asian Development Outlook, 2003 & World Development Indicators 2003Notes: South Asia share refers to the years 1991 and 2001. Data for Maldives are for the years 1993 and

2000

Box 3.2: Industrial Dynamism of the Late-Starters in South Asia

Although manufacturing accounts for a rather small proportion of GDP in most of theSouth Asian countries, it is clearly rising especially in the late-starters or the least developedeconomies in the region such as Bangladesh. As is apparent from Table below for Bangladesh,the share of manufacturing value added in GDP has risen from 12.2 per cent to 15.2 per cent by2002. On the other hand share of manufacturing has either stagnated or declined in the countrieswhere it has high share in the beginning of the period such as India. In that sense, a convergencein levels of development is taking place.

Box Table 1: Share of Manufacturing Value Added in GDP (per cent)

1990 1995 2000 2002

Bangladesh# 12.2 14.6 14.8 15.2Bhutan# 7.1 9.2 7.3 7.2India 14.8* 16.1 16.3 15.3@Maldives - 7.5 7.2 7.9Nepal 6.1 8.9 9.6 8.6Pakistan 15.7 15.6 15.5 16.3Sri Lanka - 14.7§ 15.8 15.1

Source: RIS based on ADB data.£Calculated from ADB Key Indicators 2003 from GDP at constant prices. Figures for Bangladesh are atconstant 1995/96 prices, figures for Bhutan are at 1980 prices, Indian figures are at 1993/94 price,figures for Maldives are at 1995 constant prices, figures for Nepal are at 1994/95 prices, figures forPakistan are at 1980/81 prices, that of Sri Lanka are at 1996 prices.# shares calculated from ADB Key Indicators 2003 GDP at constant prices given by industrial origin.*refers to figure for 1994;§ refers to figure for 1996; @relates to 2001.

Rise of Modern IndustriesAnother aspect of industrial dynamism of the late starters is the emergence of modern industrieswhich have grown faster than the traditional industries. The modern industries that includecapital and knowledge-intensive branches of industry such as machinery and capital godsindustries, chemicals, among others have risen faster than the traditional industries such asfood, beverages and tobacco and textiles and clothing as is clear from Table 2. In the case ofBangladesh, there appears to be a shift away from the traditional manufacturing sectors tomodern manufacturing as is evident from the decline in the share of food and beverages andtextiles and clothing coupled by more than doubling of the share of machinery and equipment.In the case of India, on the other hand, the share of machinery and equipment which was

Box 3.2 continued



The service sector has emerged asthe major contributor of income in SouthAsian countries accounting for as muchas 49 per cent of region’s GDP. Whilethe high share of services in economieswhere tourism plays an important role,viz. Maldives, Sri Lanka and Nepal canbe expected, it is striking to find thateven economies of Bangladesh, Pakistanand India have been dominated byservice sector. With the rising share ofindustry and in particular of modernmanufacturing (see Box 3.2) in the late-industrializers and of services across theregion, the economic structures ofSouth Asian economies seem to beconverging.

Not only the service sectoraccounts for a predominant share ofGDP, due to robust growth rates thesector has been contributing an everincreasing proportion of growth. AsTable 3.3 shows, service sectorcontributed nearly 55 per cent of growthof India during the 1995-02 periodcompared to just 41 per cent during thelate 1980s. Except for Bhutan and Nepal,service sector contributed for more thanhalf of total GDP growth during the1995-2002 period in each of the SouthAsian countries. The contribution ofservices even in the case of Nepal andBhutan is substantial at 34 and 44 percent. In almost all the South Asiancountries, service sector’s contributionto growth has been higher than the

substantial at 25 per cent in 1990 has actually declined to 22 per cent. In the case of Sri Lankatoo, the share of machinery and chemicals have risen. It would appear from this that economicstructures in South Asia are converging and the late starters are catching up with the countriesthat started earlier.

Box Table 2: Changing Composition of Manufacturing Sector, 1990/2000(% share of total manufacturing value added)

Food, beverage Textile and Chemicals Machinery Otherand Tobacco Clothing and Transport Manufacturing

Equipment

1990 2000 1990 2000 1990 2000 1990 2000 1990 2000

Bangladesh 24 22 38 33 17 10 7 16 15 19India 12 13 15 11 14 25 25 22 34 29Nepal 37 n.a. 31 n.a. 1 n.a. 5 n.a. 25 n.a.Pakistan 24 16 27 33 15 6 9 6 25 38Sri Lanka 51 39 24 30 4 6 4 7 17 19

Source: RIS based on World Development Indicators 2003

Competitive Industrial PerformanceYet another indicator of the industrial dynamism especially in an international comparativeperspective can be had from the performance of South Asian countries in relative rankingsamong 87 countries in 1985 and 1998 in terms of an Competitive Industrial Performance Index.

Box Table 3: Competitive Industrial Performance Index

Country Rank in 1985 Index value 1985 Rank in 1998 Index value 1998Bangladesh 74 0.008 73 0.011India 50 0.034 50 0.054Nepal 79 0.001 79 0.006Pakistan 55 0.028 60 0.031Sri Lanka 71 0.008 69 0.017

Source: RIS based on UNIDO Industrial Development Report 2002/2003.

UNIDO constructed a scoreboard of industrial performance based on the simple average of thefour indicators of performance: manufacturing value added per capita, manufactured exportsper capita, share of medium and high tech activities in manufacturing value added, and the shareof medium and high tech products in manufactured exports.

Most of the South Asian countries get poor ranks in terms of the index as is apparent fromBox Table 3 with India taking the 50th rank in the world. In terms of changes over the twopoints of time for which the index has been computed, while India’s rank at 50 stagnates,Bangladesh (73 from 74) and Sri Lanka (69 from 71) are able to improve their ranks.

Source: RIS.

Box 3.2 continued

Another striking observation fromTable 3.2 is that loss in the share ofagriculture in South Asian countries hasnot led to rising share of industry. Infact the share of industry in most caseshas stagnated and even declined in Indiaand Pakistan. An appreciable rise hasbeen observed in the cases of Bhutan(from 25 to 37 per cent) and inBangladesh (from 21 to 25.5 per cent),and Nepal (from 18 to 22 per cent) overthe 1991-2002 indicating the strides madeby these countries in their industrialization(see Box 3.2). In other countries it is theservice sector that recorded the highestincrease in the share.

Table 3.3: Contribution of Different Sectors to Output Growth ofSouth Asian Countries (per cent)


Agriculture

1985-90 26.12 34.37 29.01 9.6 51.57 22.73 21.411990-95 19.48 37.85 26.32 n.a. 32.75 26.27 14.861995-02 17.62 30.29 21.37 7.2 39.23 22.34 21.36

Industry

1985-90 20.78 31.18 30.41 13.0 17.16 28.61 27.721990-95 28.79 42.97 26.77 n.a. 28.70 22.65 28.851995-02 27.87 39.17 23.76 20.8 20.77 21.17 24.73

Services

1985-90 53.10 34.75 40.58 77.40 34.11 28.61 50.871990-95 53.73 22.80 46.91 n.a. 41.45 51.08 56.131995-02 54.57 33.57 54.87 72.0 43.89 56.49 53.99

Source: RIS estimates based on ADB data.



sector’s share in GDP. This suggeststhat service sector has emerged as themost dynamic in the South Asianeconomies and is likely to increase itsshare even further in future.

3.5 Performance in terms ofEconomic StabilizationDiscussion in Chapter 2 on the policyreforms in South Asian countries hasshown that one of the areas of focushas been attaining fiscal consolidation.Fiscal deficit is an indicator of themismatch between governmentrevenue and government expenditure.Large fiscal deficit could have anadverse effect on the level of moneysupply and hence on the inflationtrends in the economy. Also a risingfiscal deficit could adversely affectthe current account balance of theeconomy. More pronounced are theinter-linkages between fiscal deficit,money supply and inflation. If thefiscal deficit gets monetised and theresultant money supply exceeds thedemand for cash balances with theexisting price level, there will be anexcess demand for output and hence

rising prices. On the other hand, fiscaldeficit need not necessarily beinflationary as it depends on the natureof government spending. But themonetisation of budget deficit may leadto higher inflation in the economy. Evenin the absence of monetisation, if fiscaldeficit is financed by governmentborrowings then it may lead toinflationary situation through crowdingout private investment.

The trends in overall fiscal deficitof the South Asian countries arepresented in Table 3.4.2 In general itappears that fiscal deficit has beenshowing an increasing trend in almostall the countries. Yet, there are inter-country differences. The increase hasbeen notable in the case of Bhutan,Maldives, India and Sri Lanka. InPakistan there has been a declining trendsince 1998, whereas in the case ofBangladesh the decline is evident in thelast two years. Country level variationin the rate of change notwithstanding,the fiscal deficit in 2002 remained higherthan 5 per cent in most of the countries,the exceptions being Pakistan andBangladesh.

Table also reveals that in 2002,among South Asian countries, India hasthe highest fiscal deficit to the tune of10 per cent. This has been also onaccount of the deficits of stategovernments because the fiscal positionof the Central Government as presentedin Table 3.5 reveals that the fiscal deficithas only been of the order of 5.5 percent.

Has the increased fiscal deficit ledto higher rate of growth of moneysupply? Data on the rate of growth ofmoney supply (see Table 3.6 and Fig.3.2) across different countries mayenable us to reflect on the extent towhich the increasing fiscal deficit isbeing monetised. Table 3.6 shows thatwhile the countries vary in terms ofthe rate of growth in money supply,the general trend is one wherein therate of growth has been showing adeclining trend. To illustrate, in 1991the rate of growth of money supplywas as high as over 29 per cent inBhutan and nearly 25 per cent inMaldives. The lowest growth rate wasrecorded in Bangladesh (12.1 percent). When it comes to 2002 the rateof growth of money supply inMaldives declined to 19 per cent andthat of Bhutan declined to 17.6 percent. More pronounced decline wasrecorded in Pakistan and Sri Lanka(see Table). In India also there hasbeen a 3-per cent decline in the rateof growth of money supply from 19per cent in 2001. Another notabledevelopment is that there has been areduction in the inter-countryvariation in the growth of moneysupply, leading towards aconvergence in the growth of moneysupply across different countries (seeFig. 3.2) On the whole, if the availableempirical evidence is any indication,increase in fiscal deficit has not beenaccompanied by correspondingincrease in money supply. This pointstowards the decreasing monetisationof fiscal deficit.

What has been the experience ofthese countries with respect to price

Table 3.4: Overall Fiscal Position of the South Asian Economies(% of GDP)


1997 -4.3 -2.6 -7.3 -1.4 -3.9 -6.4 -7.91998 -4.1 1.0 -9.0 -1.9 -4.6 -7.6 -9.21999 -4.8 -1.9 -9.5 -4.1 -3.9 -6.1 -7.52000 -6.2 -4.1 -9.5 -4.4 -3.3 -6.6 -9.92001 -5.0 -11.8 -9.9 -4.7 -4.5 -5.2 -10.82002 -4.6 -6.8 -10.1 -7.3 -3.9 -5.2 -8.92003P -4.2 -6.0 -9.5 - -2.8 -4.4 -7.5

Source: RIS based on ADB Data.

Table 3.5: Fiscal Position of Central Government in India (As % of GDP)

Variables Revenue Revenue Capital Capital FiscalYear Receipt Expenditure Receipt Expenditure Deficit

1999-00 9.4 12.9 6.0 2.5 5.42000-01 9.2 13.2 6.3 2.3 5.62001-02* 8.8 13.0 6.8 2.6 5.92002-03# 10.0 13.9 6.7 2.8 5.5

Source: Government of India, Economic Survey, 2002-03. * Provisonal, # Budget Estimates.



trends? To provide an answer to thisquestion we shall present the data onthe consumer price index acrossdifferent countries (see Table 3.7 andFig. 3.3). From the table and the figureone could safely conclude that therehas been a steady decline in inflationrate in all the countries. The declinehas been dramatic in the case ofMaldives and Bangladesh. In case ofSri Lanka the rate of decline has beenmuch lower as compared to others.Table 3.7 also indicates that in 2002,with the exception of Sri Lanka, theinflation rate has been lower than 4per cent, whereas in 1991 the lowestinflation rate in South Asian countrieswas 8.3 per cent (Bangladesh).

Moreover, it is also observed that,similar to the trend observed in moneysupply, there is a convergence in rateof inflation across different countries(see Fig 3.3).

To sum up, it appears that theSouth Asian countries have been ableto record remarkable success instabilization and containing inflation.More importantly, the decline in therate of inflation and rate of growth ofmoney supply has been accompaniedby a pattern of regional convergence.The fact that increased in fiscal deficithas not impacted upon money supply

Table 3.6: Change in Money Supply (percent p.a.)


1991 12.1 29.6 19.3 24.9 19.5 19.9 21.51992 14.1 13.5 15.7 12.9 21.1 35.2 17.41993 10.6 23.1 18.4 36.3 27.7 11.2 23.41994 15.4 22.6 22.3 24.2 19.6 15.5 19.71995 16.1 36.0 13.7 15.6 16.1 13.8 19.21996 8.3 9.4 15.2 26.0 14.4 20.1 10.81997 10.8 30.9 18.0 23.1 11.9 19.9 13.81998 10.2 41.7 19.4 22.8 21.9 7.9 31.31999 12.8 21.4 14.6 3.6 20.8 4.3 13.42000 18.6 21.4 16.8 4.1 21.8 12.1 12.92001 16.6 5.5 14.2 9.0 15.3 11.7 13.62002 13.1 17.6 15.0 19.3 4.4 16.8 13.42003P 12.8 - 16.0 - 12.0 9.5 13.52004P 14.2 - 16.0 - 12.0 - 12.5

Source: ADB Key Indicators, 2003. The projected figures (P) are from ADB Outlook, 2003, A10, p. 290.Note: @: Simple Average.

Table 3.7: Inflation Rate CPI* (percent p.a.)


1991 8.3 12.3 13.8 14.7 9.8 12.7 12.21992 4.6 16.0 11.8 16.8 21.1 10.6 11.41993 2.7 11.2 6.4 20.2 8.8 9.9 11.71994 3.3 7.0 10.2 3.4 9.0 11.2 8.41995 8.9 9.5 10.2 5.5 7.6 13.1 7.71996 6.7 8.8 9.0 6.2 8.1 10.7 15.91997 2.5 6.5 7.2 7.5 8.1 11.8 9.61998 5.4 10.6 13.2 -1.4 8.3 7.8 9.41999 11.7 6.8 4.7 3.0 11.4 5.7 4.72000 4.1 4.0 4.0 -1.2 3.5 3.6 6.22001 1.0 3.4 3.9 0.7 2.4 4.4 14.22002 1.2 2.5 4.1 0.9 2.9 3.5 9.62003P 5.1 - 5.8 - 4.5 3.1 6.52004P 4.5 - 5.0 - 5.0 4.0 6.0

Source: ADB Key Indicators, 2003. The projected figures (P) are taken from ADB Outlook Update, September,2003.

Note: @: Simple Average.

-3

2

7

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2004

P

2003

P

2002

2001

2000

1999

1998

1997

1996

1995

1994

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tion

Rat

e (%

p.a

.)

Figure 3.3: Inflation Rate of SouthAsian countries


Figure 3.2: Growth of MoneySupply

0

5

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45


2004

P

2003

P

2002

2001

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1999

1998

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1991

Source: ADB Key Indicators, 2003.

Source: ADB Key Indicators, 2003.

tend to suggest that these countrieshave been able to bring about fiscalinnovations such that deficit is notgetting monetised. At the same time,when it comes to fiscal deficit, thesuccess of most countries remains farfrom satisfactory. Nonetheless, it isheartening to note that almost all thecountries have taken note of thesituation and have initiated measuresto contain fiscal deficit by cuttingdown government expenditure on onehand and exploring new sources ofrevenue coupled with efficient taxadministration on the other.



3.6 Concluding RemarksThis Chapter reviewed themacroeconomic performance of SouthAsian countries in the recent years andmade some projections for the comingyears. The growth performance of theregion suffered over the past few yearson account of difficult externalenvironment and domestic problems.However, the growth outlook for 2003/04 and 2004/05 appears upbeat withSouth Asian GDP expected to grow at6.9 and 7.7 per cent, respectively. Thisgrowth performance makes the regionthe second fastest growing in the worldafter China.

Another interesting developmentis the broad based nature of growthwith all the economies displaying

growth dynamism. The chapter alsonoted the remarkable industrialperformance of countries l ikeBangladesh. Service sector hasemerged as the key driver of growthin the region contributing nearly halfof income and more than half ofgrowth. The region’s economies havebuilt up substantial foreign exchangereserves to provide exchange ratestability. The region has also beensuccessful in bringing down inflationrates even though more need to bedone in the area of fiscal management.

Endnotes1 See Chapter 6 for details.2 Though the definitions of fiscal deficit vary

from country to country, broadcomparisons are possible.

ReferencesADB. 2003. Key Indicators of Developing

Asian and Pacific Countries 2003.Manila: Asian Development Bank.

Government of India. 2003. Economic Survey2002-03. New Delhi: Ministry ofFinance.

RIS. 2003. World Trade and DevelopmentReport 2003: Cancun and Beyond. NewDelhi: with Academic Foundation forResearch and Information System forthe Non-Aligned and Other DevelopingCountries.

The World Bank. 2003. World DevelopmentIndicators, 2003, (CDROM).

UNIDO. 2003. Industrial Development Report2002/03. Vienna: United Nations.


4.1 Introduction

Countries of the South Asian regionhave intensified trade reforms

during the 1990s leading to greaterintegration with the world market. Alongwith various policy reforms especiallydealing with trade and investment, therehave also been attempts at fosteringbilateral trading agreements. In the lightof these developments, this Chapterexamines the trade performance in termsof growth composition, direction andcompetitiveness.

4.2 Trends and Patterns inTrade PerformanceGrowth in Exports and ImportsTable 4.1 presents the annual growthrate in exports and imports of SouthAsian countries since 1991. Lookingat the table it appears that both exportsand imports move in the same directionin almost all the countries. For SouthAsia as a whole, the early years of1990s, particularly the period since1992, was marked by unprecedentedgrowth rates in both exports andimports. This may be seen in the

context of wide-ranging reformsespecially with respect to trade andinvestment that these countriesinitiated in the early 1990s. The periodof high trade growth rate however hasbeen followed by a period of markeddeceleration in the rate of growthsince the mid-1990s. To be morespecific, the double digit growth ratesof the mid-1990s (above 20 per cent)were followed by a period of persistentslowdown including negative growthrates during 1998. The slowdown intrade may be seen in the context of

Trade Performance andCompetitiveness4

Table 4.1: Growth Rates of Merchandise Trade of South Asian Countries, 1991-2004

(growth rates in per cent)

Year South Asia Bangladesh Bhutan India Maldives Nepal Pakistan Sri LankaExport Import Export Import Export Import Export Import Export Import Export Import Export Import Export Import

1991/92 5.2 -11.8 12.7 -7.4 7.9 -14.4 -1.1 -24.5 1.9 17 12.8 -0.2 19.8 13.1 8.1 20.71992/93 8.0 9.2 16.1 0.5 -9.6 14.0 3.3 10.3 10 18.4 56.1 15.8 14.6 7.3 20.6 15.31993/94 15.3 14.3 19.5 15.5 4.9 50.4 20.2 15.1 -19 5.9 18 14.9 0.3 11.7 16.4 14.41994/95 21.3 38.7 6.3 2.9 -4.1 -25.7 18.4 34.3 43.1 9.7 3.6 21.9 -1.4 -13.6 12 18.91995/96 20.2 21.6 37.1 39.2 10.2 4.6 20.3 21.6 12.7 20.9 -9.7 21.7 16.1 18.5 18.6 11.41996/97 6.5 12.5 11.8 19.1 39.6 14.1 5.6 12.1 -6 12.6 1.9 5.8 7.1 16.7 7.6 2.41997/98 4.8 2.3 14.0 -7.5 1.7 18.4 4.5 4.6 15.8 15.6 10.2 21.6 -2.6 -6.4 13.3 7.81998/99 -0.1 -5.7 16.8 5.4 12.0 3.7 -3.9 -7.1 3.4 1.5 11.9 -12.4 4.2 -8.4 3.4 0.41999/00 5.8 10.5 2.9 6.6 -5.9 20.5 11.6 16.5 -4.3 13.6 18.2 -10.3 -10.7 -6.7 -3.9 1.52000/01 15.5 11.4 8.2 4.4 6.6 12.8 17.0 13.0 13.2 -1.0 42.3 20.1 8.4 -0.2 19.8 22.42001/02 1.1 -1.8 11.4 11.3 -12.9 6.1 0.1 -2.8 1.4 1.3 4.6 -0.2 9.1 6.2 -12.8 -18.42002/03 7.0 2.5 -7.6 -8.7 -1.8 -4.0 11.4 6.3 18.1 -2.4 -18.0 -11.4 2.2 -6.9 -2.4 2.22003/04p 11.5 11.0 9.5 3.5 6.7 8.5 11.5 12.0 6.3 8.5 5.0 5.0 12.0 14.0 6.5 9.02004/05p 12.5 11.5 10.5 7.5 8.5 9.3 13.3 13.8 8.5 11.0 10.0 10.0 10.0 10.0 9.0 12.0

Source: RIS based on Asian Development Outlook 2003.



proportion of imports to the South Asiancountries is also from the Middle East,comprising mostly oil and gas.

Overall, it may be stated that thedirection of trade which has undergonea shift in recent times in favour ofdeveloping countries and morespecifically East and Southeast Asiancountries has been continuing althoughthere are country specific variations inthis respect.

Composition of MerchandiseTradeWe have seen that some of the SouthAsian countries have been successfulin diversifying into manufactured goods.To what extent have such changes inthe domestic production structure gotreflected in trade? Data presented inTable 4.2 tends to suggest that theexport basket of the South Asiancountries is primarily dominated bymanufactures. This indicates a shiftfrom primary commodities exports tomanufacturers, which has importantpositive implications for income andemployment generation opportunities inthese countries. In this respect,Bangladesh and Sri Lanka showed abetter performance as compared toothers. In Bangladesh the share ofmanufacturers increased from 77 percent in 1990 to 91 per cent in 2000. Incase of Sri Lanka the increase was from54 per cent to 77 per cent. It is also tobe noted that in most of the South Asiancountries the manufactured exportscomprises of one or two commoditieslike textile and clothing. Hence, the needfor diversifying into other manufacturedgoods cannot be over emphasized.However, primary commodities still havean important role in South Asiancountries’ exports. Some of the notableprimary products include jute in thecase of Bangladesh, tea for Sri Lankaand India, rice for India and Pakistan,iron ore for India, etc.

The import structures of the SouthAsian countries show that manufacturedgoods account for more than 50 percent of imports in all the countries. Here

Trade Performance and Competitiveness

Figure 4.1: Export Growth across South Asian Countries(Actual and Projected), 1991-2004

Figure 4.2: Import Growth across South Asian Countries(Actual and Projected), 1991-2004

unfavorable international environmentsparticularly due to East Asian financialcrisis (Table 4.1 and Figures 4.1 and4.2). The low growth phase continuedeven in the early years of the newmillennium mostly on account ofsluggish world demand. Thus, as theSouth Asian economies got integratedwith the world market, their exportperformance became highly susceptibleto world export market. This in turn,as seen in Chapter 3, has had itsimplications on the overall growthperformance of these economies. In thelight of recent upswing in the worldeconomy the prospects for the nearterm appear to be bright. The exportsof the region are expected to grow byabout 14 per cent in 2003/04 and 2004/05 which is indeed robust especiallyconsidering the appreciation of somecurrencies in the region. Another trendthat can be observed from the figuresis the growing convergence acrossSouth Asia in terms of growth rates ofexports as well as imports.

Direction of TradeAn analysis of the direction of tradesuggests that the South Asian countriescontinue to depend on developed countrymarkets for their exports. However, theimportance of the developing countrieshas also been growing over the past decade(1990-2001) especially in the East andSoutheast Asian region and China(Figure 4.3 and RIS 2002).

The major sources of imports intothe South Asian region have alsoexperienced some change during theperiod under consideration. Thoughindustrial countries continue to bepredominant suppliers of the SouthAsian imports, the shares of developingcountry trade partners have gone upduring the 1990s. A large proportion ofthese growing imports came from suchdeveloping countries of East andSoutheast Asia and China. While theproportion of imports from East Asiaand China is high for most countries inSouth Asia, it has increased significantlyfor India during the decade. A large

-20

-10

0

10

20

30

40

50

60

Sri LankaPakistanNepalMaldivesIndiaBhutanBangladeshSouth Asia

2004

/05p

2003

/04p

2002

/03

2001

/02

2000

/01

1999

/00

1998

/99

1997

/98

1996

/97

1995

/96

1994

/95

1993

/94

1992

/93

1991

/92

Source: RIS based on Asian Development Outlook 2003.

-30

-20

-10

0

10

20

30

40

50

60

Sri LankaPakistanNepalMaldivesIndiaBhutanBangladeshSouth Asia

2004

/05p

2003

/04p

2002

/03

2001

/02

2000

/01

1999

/00

1998

/99

1997

/98

1996

/97

1995

/96

1994

/95

1993

/94

1992

/93

1991

/92


again, Bangladesh and Sri Lankareported remarkable increase in the shareof manufactured imports. Theincreasing import and export intensityof the countries may be seen in thecontext of increased trade andinvestment liberalization which in turnenables these countries to be part ofglobal production networks. The importstructure, in general, reflects the gapsbetween domestic production anddemand with some of the countriesimporting food grains, while othersdepend upon imports to meet thedomestic demand for energy (Table 4.3).These countries also source theirrespective requirement of industrialintermediates, machinery and capitalequipment and even durable consumergoods from abroad in variousproportions.

Composition of Trade in ServicesIt is a well-known fact that the globaltrade in services has been growing ata rapid pace in recent times. Theglobal trends are also reflected in thecase of the South Asian countries.Trade in services or invisibles in theSouth Asian region grew substantiallyduring the 1990s.1 Except Bangladesh,the South Asian countries registeredphenomenal growth of commercialservice exports (Table 4.4). From thesame table it is evident that in terms ofcomposition of services, the SouthAsian region has made strides in theareas of travel and transport services.


Imports: Developing Countries (1990) Imports: Developing Countries (2001)

Imports: Industrial Countries (1990) Imports: Industrial Countries (2001)

Exports: Developing Countries (1990) Exports: Developing Countries (2001)

Exports: Industrial Countries (1990) Exports: Industrial Countries (2001)

Figure 4.3

Table 4.2: Structure of Merchandise Exports

Merchandise Food Agricultural Fuels Ores and Manufacturesexports ($ mn.) (% of total) raw materials (% of total) metals (% of total)

(% of total) (% of total)

1990 2001 1990 2000 1990 2000 1990 2000 1990 2000 1990 2000

Bangladesh 1671 6530 14 7* 7 2* 1 0* - 0* 77 91*Bhutan - - - - - - - - - - - -India 17969 43611 16 13 4 1 3 4 5 3 71 77Maldives - - - - - - - - - - - -Nepal 204 737 13 10 3 0 - 0 0 0 83 67Pakistan 5615 9242 9 11 10 2 1 2 0 0 79 85Sri Lanka 1912 4817 34 21 6 2 1 0 2 0 54 77

Note: * refers to 2000 data.Source: RIS based on World Bank, World Development Indicators, 2002 and 2003.

Source: RIS based on World Bank, World Development Indicators, 2002 and 2003.


However, in case of India, the recentgrowth has been largely owing to “othercommercial services” that havecontributed over 71.4 per cent of India’sservices exports in 2001 as comparedto around 45.4 per cent in 1990. Thiscategory includes India’s growingexports of IT (information technology)software and related services that havegrown at a compound rate of over 50per cent over the past five-six years. Incase of Sri Lanka also other commercialservices have become vibrant in growthand more than half of the servicesexports are emanating from this sector.In case of Bangladesh, transport sectorrecorded remarkable increase in itsshare.

The South Asian countries’ importsof services have also grown in recenttimes. Transport services are the leadingitem in their import basket (Table 4.5).In Bangladesh, India, Pakistan and SriLanka, transport services accounts foraround 60-70 per cent of total imports

of commercial services during the1990s. However, in 2001 it appears thatimports of transport services in the caseof India and Sri Lanka have sloweddown. For Nepal, imports of travelservices have been quite prominent.

4.3 South Asia’s ExportPerformance in aComparative GlobalPerspectiveTo get a more comprehensive pictureof their trade performance an attempthas been made to analyze the tradeperformance of South Asian countriesby referring to the trade performanceindex as developed by the ITC. It isdifficult to have an all-embracingdefinition of successful tradeperformance. Some developingcountries, for instance, record highgrowth rates by specialising in nichemarkets and concentrating their exportmarkets, while other developingcountries record more moderate rates

of growth with a well diversified arrayof products and partner countries. Inother cases, successful performance isthe result of a favourable product ormarket penetration since the beginning.Successful performance can also begauged in terms of a country’s abilityto adapt its export profile to changingpatterns of world demand. The lastapproach is the most dynamic anddemand-driven trade policy stance. TheTrade Performance Index (TPI)designed by ITC aims to tackle thecomplex and multidimensional nature oftrade patterns.

It is evident from Table 4.6 that thetrade performance of the South Asiancountries at the global level has beendismal in relative sense. This is clearfrom the fact that in the area of basicmanufactures, out of 184 countries inthe world, the rank of South Asianranged between 122 and 129. Similar isthe situation in various other sectorssuch as fresh food, processed food,textiles, chemicals, etc. However, datafor these sectors are not reported herefor shortage of space. During some ofthe recent years (in most cases theperiod is 1997-2001) in terms of exportsof basic manufactures some countriesof the South Asian region such asBangladesh, India and Pakistan haveshown dynamism as compared to othercountries in the world.

However, in terms of rate of percapita exports only Nepal and Pakistanappeared to have fared better ascompared to other South Asian


Table 4.3: Structure of Merchandise Imports

Merchandise Food Agricultural raw Fuels Ores and ManufacturesImports ($ mn.) (% of total) materials (% of total) metals (% of total)

(% of total) (% of total)

1990 2001 1990 2000 1990 2000 1990 2000 1990 2000 1990 2000

Bangladesh 3618 8397 19 15* 5 5* 16 7* 3 2* 56 69Bhutan - - - - - - - - - - - -India 23580 49618 3 5 4 3 27 37 8 5 51 48Maldives - - - - - - - - - - - -Nepal 672 1473 15 13 7 4 9 16 2 3 67 49Pakistan 7411 10617 17 12 4 4 21 29 4 3 54 50Sri Lanka 2688 5925 19 14 2 1 13 9 1 1 65 74

Note: * refers to 2000 data.Source: RIS based on World Bank, World Development Indicators, 2003.

Table 4.4: Structure of Service Exports

Commercial Transport Travel Otherservice exports (% of (% of total (% of

($ mn.) total services) services) total services)

1990 2001 1990 2001 1990 2001 1990 2001

Bangladesh 296 242 12.9 29.5 6.4 19.6 80.6 50.8Bhutan - - - - - - - -India 4610 20390 20.8 10.6 33.8 17.9 45.4 71.4Maldives - - - - - - - -Nepal 166 303 3.6 15.6 65.6 47.5 30.8 36.9Pakistan 1218 1302 59.3 62.8 12.0 6.8 28.7 30.4Sri Lanka 425 1344 39.7 29.7 30.2 15.8 30.1 54.5

Source: RIS based on World Bank, World Development Indicators, 2003.


countries. This indicator is importantbecause it may be argued that the levelof exports is determined by the demandfor a country’s products in worldmarkets and a country’s ability to satisfythat demand, which can be related toits size. Hence, the value of per capitaexports shows how outward looking isa country, and the extent to which thepopulation produces for the worldmarket. The change in per capitaexports reflects changes in a country’soutward looking stance andperformance for the group of productsconsidered.

In terms of share in global marketin basic manufactures except India othercountries have not performed very well(Table 4.6). While India’s rank has been34, other countries have ranked in therange of 83-121. There are two moreaspects that need to be taken intoaccount while assessing the tradeperformance, viz. productdiversification as well as market

diversification. The South Asiancountries have performed relativelybetter in terms of market diversificationas compared to product diversification.

Skill and Technology Content ofSouth Asian ExportsThe South Asian exports are widelyperceived to lack dynamism in termsof their skill and technological content.2

Recent studies have analysed the SouthAsian export structure in terms of skill-intensity of exported products andtechnological capability. One of thestudies divides all (merchandise) exportsinto two broad categories –manufactured and primary – each ofwhich is further divided in two, withmanufactures being split between skill-intensive and labour-intensive items, andprimary exports between processed andunprocessed items.3 Thus, whiletextiles, clothing, leather manufacturesand footwear, and wood products areclassified as labour-intensive

manufactures, cut diamonds,chemicals, machinery and transportequipment, and instruments are skill-intensive. The second study on theother hand, classifies the exported itemsas resource based, low, medium andhigh technology products.4

It was shown that South Asia hasan unusual merchandise export pattern,concentrated on labour-intensivemanufactures, with few primary exports(particularly processed ones) and fewskill-intensive manufactured exports. Allthree of these distinctive features ofSouth Asia’s export structure areexplained largely by the distinctivecomposition of its resources. Thispattern can be explained in terms of theSouth Asian resource structure, viz. lowskill per worker and low land perworker.

Though manufactured/primaryexport ratios tend to increase with theirskill/land ratios across countries, SouthAsia exports a higher proportion ofmanufactures than would be predictedfrom its skill/land ratio. Further, the factthat South Asia exports only a smallshare of its primary exports in processedform appears to be well explained byits low level of skill per worker. Thus,the exceptionally small share ofprocessed primary items in South Asia’stotal exports is explained by its uniquecombination of low levels of both skillper worker and land per worker. Intrying to explain the proportion of skill-intensive to labour-intensive


Table 4.5: Structure of Service Imports

Commercial Transport Travel Otherservice imports (% of (% of total (% of

($ mn.) total services) services) total services)

1990 2001 1990 2001 1990 2001 1990 2001

Bangladesh 554 1375 71.1 75.0 14.1 12.0 14.9 12.9Bhutan - - - - - - - -India 5943 23419 57.5 41.1 6.6 13.1 35.9 45.8Maldives - - - - - - - -Nepal 159 205 40.8 34.9 28.5 38.8 30.7 26.3Pakistan 1863 2216 67.0 70.1 23.1 11.4 9.9 18.5Sri Lanka 620 1729 64.2 48.9 11.9 14.2 23.9 36.9

Source: RIS based on World Bank, World Development Indicators, 2003.

Table 4.6: Trade Performance Index in Basic Manufactures in South Asian Countries

INDICATORS Bangladesh Bhutan India Nepal Pakistan Sri Lanka

Relative Rankings among 184 countries 122 124 129 - 124 129Trend of exports 18 123 53 70 26 105Average annual change in per capita exports 105 121 80 25 54 99Share in world market 83 119 34 121 95 93Product diversification 81 123 24 90 81 94Product spread (concentration) 71 124 19 103 86 81Market diversification 53 122 32 44 62 71Market spread (concentration) 62 122 14 88 45 74

Source: RIS based on Market Analysis Section, International Trade Centre, UNCTAD/WTO.Note: Data Year for Bangladesh is 1997-2001, Data Year for Bhutan is 1995-1999, Data Year for India is 1997-2001, Data Year for Nepal is 1995-1999, Data Year

for Pakistan is 1995-1999, Data Year for Sri Lanka is 1997-2001.* Data is for Miscellaneous Manufacturing.


manufactures by the level of skills inSouth Asia, it is found that South Asiaexports an even smaller share of skill-intensive items than would be predictedfrom its low level of education. Thus,South Asia has a large pool of labour,relative to its supplies of both skill andland, and so its exports are concentratedon types of goods, which use largeinputs of labour and small inputs of bothskill and land.

Developing countries are foundspecialized in labour-intensive processeswithin technology-intensive activities,but manufactured exports from SouthAsia suffer deterioration of their smallshare, despite a substantial industrialbase.5 The South Asian export structureis significantly reliant on low technologyproducts. At the same time, South Asiais found to have reduced its dependenceon resource based manufactures bymarginally increasing its reliance onmedium and high technology products.

In case of exports of resourcebased manufactures, South Asia’s shareof other resource based productsincreased indicating changes instructure, though there is not muchchange in total resource based productsbetween 1985 and 1998. South Asiashows modest gains in share in bothcategories of low-technologymanufactures, but with littlediversification over time for textiles orotherwise for products like toys, sportsgoods and light engineering products.In fact, the lack of diversification fromclothing is an important trend forsuccessful clothing exporters like SriLanka, Bangladesh, and Pakistan,among others. On the other hand, incase of medium technology exports,South Asia’s tiny market share showssmall increase over time. In South Asia,auto and engineering exports lose marketshare as against the gains made byprocess industries. In case of thelargest and fastest growing exports ofhigh technology products, South Asiahas a small and declining presence.

The analysis further shows that thehighest revealed comparative advantage

(RCA) for South Asia is in lowtechnology manufactures and primaryproducts, with resource basedmanufactures close to the latter. WhileRCA is lowest in high technologyproducts, the region has the highestrevealed comparative advantage in lowtechnology ones, bearing out its heavydependence on textile-related exportsand its slow technological upgradation.Thus, South Asia’s export performancecontrasts the findings that the largestand most successful exporters in theworld specialize in high and mediumtechnology manufactures and thatspecialization in the former isincreasingly related to export success.

The above review shows thatsimple two-factor trade models assumeaway such phenomena by taking asgiven that enterprises operate onuniversally known and well-behavedproduction functions. The introduction ofcapital mobility and skills into theexplanation makes the theory morerealistic, and scale and agglomerationeconomies lead countries, ceteris paribus,to establish cumulative edge by being firstmovers and adding to their advantagesover time. Above all, comparativeadvantage depends (again cumulatively)on technological capability, which in away depends on national ‘learningsystems’. Since learning costs and risksrise with technological complexity,interventions may be called for. Thesystemic, path-dependent and policy-based nature of comparative advantagehelps explain why export successacross products is so concentrated inthe developing world. This is even truefor the South Asian countries. Theability to absorb technologies efficientlyand react competitively to changingtechnological conditions depends on the‘learning system’ in place.6

4.4 Challenges for ImprovingExport CompetitivenessIn this section certain measures toimprove export competitiveness arepresented. While some of them couldbe undertaken by individual countries,

others involve cooperative action bydifferent countries of South Asia. Thisis particularly important because in theevent of a more globalized tradingregime on the one hand and increase inprotectionist tendencies in theindustrialized world, on the other, posea particularly complex and paradoxicalsituation in which firms from the SouthAsian region would have to competeglobally and improve their tradeperformance.

Forging Public-PrivatePartnershipIn order to ensure that South Asian firmsbecome more competitive in relation toother entities in the global market it isimperative to set in place appropriateinstitutions. It has been observed thatin the era of globalization wherein theroles of markets and governments havetended to be redefined, often the role ofgovernment is unclear and one of itsmanifestations is in an inadequateinvestment environment. In this context,it may be pointed out that institutionalinfrastructure which affects how firmsdevelop entrepreneurial andtechnological capabilities requiresemphasis.7 Therefore, emphasis hasbeen laid upon a working partnershipbetween the state and the market aswell as the building-up of institutions.8

In order to find out as to what kind ofharmony is required in a public-privatepartnership, often recourse is taken towhat is known as the O-Ring Theoryof economic development (Box 4.1).

It was argued that production isoften the result of a series of tasks asto be found on an assembly line kind ofproduction. These tasks can beperformed at different levels of “skills”,where the latter refers to the probabilityof successfully completing the task. Forthe final product or service to besuccessfully sold in the market, everysingle task needs to be completedaccurately. This implies interdependencein as much as the value of eachworker’s efforts depends on the qualityof all other workers’ efforts. One of



Upgrading the Technology Profileof South Asian ExportsAs observed earlier, South Asian exportstructures continue to be dominated byrelatively simple technology and labourintensive goods.10 The South Asiancountries have not been able to upgradetheir export profile in favour of relativelymore skill and technology intensivegoods unlike the Southeast Asiancountries such as Malaysia and China.The low skill and technology intensivegoods are not only low value addingcompared to knowledge intensive goodsbut are also slow moving because ofincreasing price competition.11

Therefore, the inability of thesecountries to diversify their export-


the implications of Kremer’s theory isthat it explains why workers of similarskills have strong incentives to matchtogether, i.e. highly skilled workers willattempt to work with other highly skilledworkers; likewise, low-skilled workers.The consequence is that highly skilledworkers complement each other, givingrise to increasing returns to skills withthe result that productivity will be evenhigher. Similar is the situation in the caseof unskilled workers.9

It is in this spirit in which a public-private partnership needs to be forgedand a higher level of competitivenessbe achieved by utilizing thecomplementarities among labour forceat different levels of the skill-spectrum.

structure in favour of more modernproducts has cost them dearly in termsof slower export growth and lowervalue realization.

A part of the explanation lies in therelative neglect of science andtechnology and R&D activity by thesecountries that is the key to internationalcompetitiveness in knowledge intensiveindustries. All South Asian countriespresently spend much less than one percent of their national income on R&Dand its proportion has actually gonedown in the 1990s. In contrast, theproportion of R&D activity in GNP indeveloped and newly industrializingcountries is much higher at about 2.5per cent and has been going up.12

Among the South Asian countries, Indiahas made limited attempts to build localtechnological capability with cumulativeinvestments in development ofinfrastructure for higher technologicaleducation, public funded nationalinnovation system and other policies tospur innovation including a softer patentregime that has facilitated a rapidabsorption of spillovers of innovations.These investments have led to India’sgrowing presence in the chemicals andpharmaceutical industry and incomputer software industry in recentyears. Given the critical importance ofR&D activity for internationalcompetitiveness, especially in theknowledge intensive industries, theSouth Asian countries need to augmentthe resources for this, especially in areasof their core competence.

Increasing Value Addition inTraditional ExportCommoditiesAs is typical of poorer countries, anumber of traditional exportcommodities of the South Asiancountries are exported in bulk. Owingto lack of marketing power and otherconstraints, it has not been possible toincrease the value added realization overtime. Tea offers a typical example. SriLanka and India are two major exportersof tea in the world, accounting for over

Box 4.1: The O-Ring Theory of Development

Why are wage and productivity differentials between industrial and developing countriesso large? An O-ring is a donut-shaped rubber seal. The O-ring metaphor was applied byKremer (1993) to explain why such large differences in income exist between industrial anddeveloping countries. The implications of his theory are very important since they seem tocontradict a great deal of conventional wisdom, especially regarding the implications of thetheory of comparative advantage.

The model has very important applications for both economic development and labormarkets. It explains, for example, why highly skilled workers want to migrate to industrialcountries, giving rise to the brain drain. They will be much more productive after they havemigrated, even though their individual skills remain the same. Migration allows them to matchup with the skilled labor force in the industrial country. Conventional economic theory wouldsuggest that as surgeons are a scarce factor of production in, say, India, compared with, say, theUS, their marginal products and pay would be commensurately higher than their US counterparts.In fact, their wage rates are much lower.

Financial capital will also flow to the richest countries since increasing returns imply thatthe rate of return is higher where it is already abundant. The model is also consistent with theevidence that rich countries specialize in the production of complicated products; that firmsare larger in industrial countries; and that firm size and wages are positively correlated.

Differences in product quality are associated with differences in workers’ skills, andexplain why Italian bicycle manufacturers can compete with their PRC counterparts, despitethe difference in labor costs. The matching story also offers and explanation of income differencesamong countries. A small difference in workers’ skills leads to a proportionally larger differencein wages and output, so wages and productivity differentials among countries with differentskills levels are huge.

Arguably, O-ring effects exist across firms. Suppose one firm builds roads and anothercars. The additional value to drivers of an improvement in the quality of cars most likely willbe smaller if the roads happen to be of poor quality, and vice versa. When tasks are performedsequentially (as in global value chains), highly skilled workers will perform the tasks at thelater more complex stages of production, which explains why poor countries have highershares of primary output in GDP, and why workers are paid more in industries with high-valueinputs. Also, under sequential production, countries with highly skilled workers specialize inproducts that require expensive intermediate goods, and those with low-skill workers specializein primary production. In other words, there is nothing natural about the international patternof specialization: comparative advantage in primary goods, manufactures, and services is itselfendogenously determined.

Source: Kremer, Michael, (1993), “The O-Ring Theory of Economic Development”, The Quarterly Journal ofEconomics, 108 (3) as cited in ADB (2003).



37 per cent of the world market.However, since South Asian tea is stillexported in bulk, value addition takesplace mainly in other countries in termsof blending, packaging and branding.Sri Lankan steps to increase the extentof value addition in the industry havemet with limited success so far.13

Preparing the Textiles andClothing Industry to Face thePost-MFA ScenarioTextiles and garments have emerged asone of the most important items ofexports for all the South Asiancountries. The biggest challenge is toprepare their textiles and garmentindustry for the post-MFA regime.Under the Agreement on Textiles andClothing, the MFA quotas will be phasedout by AD 2005. The South Asiancountries will then be freely competingwith China, and Southeast Asiancountries, among others, in the textilesand clothing market. Paradoxically,protectionism in the form of MFA quotashas helped some of the South Asiancountries, such as Bangladesh, Nepaland Sri Lanka, to develop their export-oriented garment industries by insulatingthem from direct competition fromestablished producers. Bangladesh, forinstance, now derives some 60 per centof its export earnings from garmentexports. Therefore, the challenge is toimprove the competitiveness of the SouthAsian garment industry by increasingvertical integration, capturing economiesof scale as also focusing on horizontalspecialization, incorporating innovativedesigns, and taking a stake in the globalmarketing networks.

Realizing the Potential ofRegional Economic Cooperationin South AsiaLiberalization of trade and investmentsregimes at the regional level that wouldfacilitate efficiency-seekingrestructuring of the region’s enterprisesby making them more competitive, asdiscussed later in the chapter on regionalcooperation. This could help the South

Asian exporters face the challenges ofinternational markets much better. As ithas been observed, one characteristicof the South Asian countries’ exportsto outside the region is the lowrealization of value added. The bulk oftheir products are exported at a ratherearly stage of processing. Much of thevalue addition in garments, for instance,takes place at the stage of branding andmarketing. The South Asian countriesshould consider setting up South Asialevel mega-companies to foster anintegrated South Asian textiles sector.This approach could avoid the inter-secompetition that prevails today causingmutual disadvantages. In order to securetheir markets overseas and to realize agreater proportion of value added, theSouth Asian exporters should considertaking over a few marketing anddistribution chains in their lines ofproduction in developed countries.Given the scale of resources involvedin such takeovers, it may be beyond thecapacity of individual exportingcompanies or individual membercountries. However, this could be doneby forming a regional consortia of theSouth Asian exporters.

Similarly, joint ventures of regionalcommodity exporters could undertaketheir packaging and marketing on behalfof joint venture partners. This approachcould be fruitful for tea, coffee, jute,cardamom, basmati rice, etc. which arecurrently exported in bulk and aresubject to low unit value realization.

Dealing with the Emerging SPSMeasures and TBTsRegional cooperation can also beeffective in dealing with emergingenvironment and health related non-tariff barriers in developed countries,such as sanitary and phyto-sanitary(SPS) measures and technical barriersto trade that are potentially verydamaging for South Asian exports. Forinstance, cooperation among the SouthAsian countries to launch a regional eco-label could make it more visible andacceptable than individual labels besides

conserving resources on itspromotion.14

A Coordinated Approach to WTONegotiationsThe WTO process has an increasinglyimportant role in shaping the patternsof trade. Hence, South Asiancoordination is important for securingtheir common interests. Owing to theconsensual approach adopted in WTOnegotiations, a coordinated response bythe South Asian countries would bemore effective in realizing theirobjectives. The South Asian countrieshave already begun extensiveconsultations on WTO issues under theSAARC umbrella.

Endnotes1 RIS, 2002.2 Mayer and Wood, 2000 and Lall, 2000.3 Mayer and Wood, 2000.4 Lall, 2000.5 Lall, 2000.6 Mayer and Wood, 2000, and Lall, 2000.7 ADB, 2003.8 Stern and Stiglitz, 1997.9 Kremer, 1993.10 See RIS, 2002, Mayer and Wood, 2000 and

Lall, 2000.11 See Lall, 1999. See also Sinha-Roy, 2001.12 See RIS, 1999; Kumar and Siddharthan, 1997:

Chapter 2; Kumar, 1998: Chapter 2.13 RIS, 2002.14 See RIS, 1999.

ReferencesADB. 2003. Asian Development Outlook. New

York: Oxford.Central Bank of Sri Lanka. 2002. Annual Report

http://www.lanka.net/centralbankDhaka Chamber of Commerce and Industry.

2003. http://www.dhakachamber.comGovernment of India. 2003. Ministry of

Commerce and Industry. http://commerce.nic.in/exports_success.pdf

Government of India. 2002. Economic Survey2001-02.

Kumar, N. and N.S. Siddharthan. 1997.Technology, Market Structure andInternationalization - Issues and Policiesfor Developing Countries. London andNew York: Routledge for UNU/INTECH Studies in New Technology andDevelopment.


Kumar, N. 1998. Globalisation, ForeignDirect Investment and TechnologyTransfers. Impacts on Prospects forDeveloping Countries. London and NewYork: Routledge.

Lall, S. 1999. “India’s Manufactured Exports:Comparative Structure and Prospects”.World Development. 27(10): 1769-86.

Kremer, Michael. 1993. “The O-Ring Theoryof Economic Development”. TheQuarterly Journal of Economics, 108 (3).

Lall, S. 2000. “The Technological Structureand Performance of Developing CountryManufactured Exports, 1985-1998”.Oxford: International DevelopmentCentre, University of Oxford.(Mimeographed).

Ministry of Industry, Commerce and Supplies.2003. Export Promotion Board, http://www.epb.gov.np

Government of Pakistan. 2003. EconomicSurvey 2002-2003. Ministry of Finance,

http://www.finance.gov.pk/survey/home.htm

Kumar, Nagesh. (ed.). 2000. Indian EconomyUnder Reforms: An Assessment ofEconomic and Social Impact. New Delhi:Bookwell for RIS.

Mehta, Rajesh. 1999. Tariff and Non-TariffBarriers on Indian Economy: A Profile.New Delhi: Research and InformationSystem for the Non-Aligned and OtherDeveloping Countries.

Government of India. Economic Survey 2002-03. New Delhi.

Mayer, J. and A. Wood. 2000. “South Asia’sExport Structure in a ComparativePerspective”. IDS Working Paper 91.Sussex: Institute for DevelopmentStudies.

Mayer, J.R., and Adrian Wood. 2001. “SouthAsia’s Export Structure in a ComparativePerspective.” Oxford DevelopmentStudies, Vol. 29, No. 1.

RIS. 1999. SAARC Survey of Development andCooperation 1998/99. New Delhi:Research and Information System for theNon-Aligned and Other DevelopingCountries.

RIS. 2002. South Asia Development andCooperation Report 2001/02. NewDelhi: Research and Information Systemfor the Non-Aligned and OtherDeveloping Countries.

Sinha Roy, S. 2001. “Post-Reforms ExportGrowth in India: An ExploratoryAnalysis.” RIS Discussion Paper No. 13.New Delhi: Research and InformationSystem for the Non-Aligned and OtherDeveloping Countries.

Stern, N. and Joseph Stiglitz. 1997. “AFramework for a Development Strategyin a Market Economy: Objectives, Scope,Institutions and Instruments.” EBRDWorking Paper 20. April.



5.1. Introduction

Foreign direct investment (FDI) flowsare widely seen as catalysts of

development which bring, together withtechnology, other scarce and criticaldevelopmental resources such asentrepreneurship and capital. Mostdeveloping countries, therefore, seek toattract FDI flows with different policyinstruments. Since the mid-1980sconsiderably more emphasis has beenplaced on FDI in the current scenarioof drying up of soft credits andaccumulation of huge external debt bydeveloping countries which has affectedthe flow of commercial credit to them.FDI inflows received by developingcountries have risen steadily from anannual average of US$ 30 billion in thesecond half of the 1980s and to a peakof $ 246 billion in 2000 before decliningto $ 162 billion in 2002. The trend ofrapid rise in FDI inflows in developingcountries tends to be a cause ofoptimism because it is associated withmultiple benefits such as technologytransfer, market access andorganisational skills. The trend of risingimportance of arm’s length licensing asan alternative channel of technologytransfer has also been reversed since

5


the mid-1980s and FDI has emerged asthe principal channel of technologytransfer again.1 Multilateral financingagencies have generally includedliberalization of policy towards FDIamong the conditionalities attached withstructural adjustment financing supportprovided by them to developingcountries. As a result, most developingcountries attempt to attract FDI inflowswith liberalization of policies, promotionand incentives.

As observed in Chapter 2, SouthAsian countries have also liberalizedtheir policy regimes towards FDI sincethe early 1990s. This Chapter examinesthe experiences of South Asian countriesin attracting FDI and patterns and trendsin these flows.

5.2. FDI Flows in South AsiaFDI inflows attracted by South Asiahave steadily grown over the 1990s froman annual average of US$ 1.7 billionduring the first half of 1990s to US$4.6 billion in 2002. However, themagnitude of inflows is yet to scale thepeak of US$ 4.9 billion achieved in1997.

In terms of the relativeattractiveness of the region for FDI vis-à-vis its peers, viz. other developing

countries over time, we examine thetrends in the share of South Asia in FDIinflows received by developingcountries and the share in FDI inflowsreceived by developing Asia. Theseshares, as plotted in Figure 5.1, suggestthat even though South Asia has been arelatively small destination for FDIinflows with only less than 5 per centof inflows attracted by developing Asia,its share is clearly increasing especiallyin the period since 2000.

As is clear from Table 5.1, there isconsiderable variation in the magnitudesof FDI received by different South Asiancountries. This variation is expected,given the different sizes of theireconomies. In order to examine therelative position, we look at the patternsin terms of the share of FDI inflows ingross fixed capital formation acrosscountries. This proportion summarizedin Table 5.2 suggests that generally therelative importance of FDI as a sourceof capital investment is much smallerin South Asian countries compared tothe Southeast Asian countries ordeveloping countries in general wherethe FDI contributed about 10 to 15 percent of total gross fixed investments.In South Asia this proportion rangesbetween negligible for Bhutan (and of

Foreign Direct Investment andGlobal Production Networks


late in Nepal as well) to around 6-7 percent in Sri Lanka and Maldives. In thecase of Pakistan, it has ranged between5-6 per cent except for a substantial risein FDI inflows in 2002 to US$ 823million from $ 385 in the previous year,resulting in a hefty rise in the share ofFDI in capital formation from 4.9 percent to 10.7 per cent. This makes theimportance of FDI in Pakistan quitecomparable to that in developing Asiancountries.

The other trend that is discerniblefrom Figure 5.2 is the fact that the

proportion of FDI in the gross fixedcapital formation is rising in most of thecountries over time especially since2000.

5.3 Explanations for SmallShare of South Asia in FDIInflowsAlthough FDI inflows to South Asiahave grown steadily over the 1990s,relatively small share of the region ininflows, despite a sufficiently largemarket comprising 1.3 billion people,needs an explanation.

In that context, one turns to theempirical studies on determinants of

FDI inflows conducted in cross-countryframework. A recent study ofdeterminants of penetration of US andJapanese FDI across 74 countries overthree points of time and across sevenbranches of industry, conducted in theframework of an extended model oflocation of foreign production, hasfound that a country’s attractivenessto FDI is influenced by structuralfactors such as market size (incomelevels and population), extent ofurbanization, quality of infrastructure,geographical and cultural proximitywith major sources of capital, andpolicy factors, viz. tax rates,

Table 5.1: FDI Inflows in South Asian Countries, 1991-2002

(Millions of dollars)

Annual average1991-1996 1997 1998 1999 2000 2001 2002

World 254326 481911 686028 1079083 1392957 823825 651188Developing economies 91502 193224 191284 229295 246057 209431 162145Developing Asia 59411 109092 99983 105529 142091 106778 94989Bangladesh 8 139 190 180 280 79 45Bhutan 1a -1a -a -a -a -a -a

India 1085 3619 2633 2168 2319 3403 3449Maldives 8 11 12 12 13 12 12a

Nepal 8 23 12 4 - 21a 10a

Pakistan 501 713 507 530 305 385 823Sri Lanka 125 433 150 201 175 82 242South Asia 1735 4938 3504 3095 3092 3961 4559South Asia’s share in Developing Asia 2.92 4.53 3.50 2.93 2.18 3.71 4.78South Asia’s share in Developing Countries 1.90 2.56 1.83 1.35 1.26 1.89 2.81

a Annual average from 1993 to 1996.Source: RIS based on UNCTAD data.

Figure 5.1: Share of SouthAsian Countries in FDI Inflows,

1991-2002

Table 5.2: FDI Inflows as a Percentage of Gross Fixed Capital Formationin South Asia, 1991-2002

Annualaverage,

1991-1996 1997 1998 1999 2000 2001 2002

World 4.4 7.5 10.9 16.5 20.8 12.8 12.2Developing countries 6.5 11.4 12 14.3 14.6 12.7 10.5Asia 6.1 9.7 10.2 10.7 13.1 9.8 7.2South, East and South-East Asia 7.4 10.4 11 12.2 14.8 10.3 7.3Bangladesh 0.1 1.6 2.1 1.8 2.7 0.8 0.4Bhutan 0.6 -0.5 0.2 0.2 0.2 0.2 0.2India 1.3 4 2.9 2.2 2.3 3.2 3.2Maldives 8.5 6.5 6.6 5.8 8.9 6.5 6.5Nepal 0.9 2.2 1.2 0.5 1 2 0.9Pakistan 5.3 7.4 5.7 6.4 3.7 4.9 10.7Sri Lanka 4.6 11.8 3.8 4.7 3.8 2.4 6.6

Source: RIS based on UNCTAD data.

1

2

3

4

5

South Asia's share in Developing Countries

South Asia's share in Developing Asia

2002200120001999199819971991-1996

Foreign Direct Investment and Global Production Networks



investment incentives, performancerequirements. In terms of these, whileSouth Asia’s large population base(especially of countries like India,Pakistan and Bangladesh) may be anadvantage, their low income levels, lowlevels of urbanization and relatively poorquality of infrastructure aredisadvantages. Furthermore, SouthAsian countries also are at adisadvantage in terms of the relativegeographical and cultural proximity withmajor sources of FDI such as the US,Europe or Japan.2 It also suggests thatthe potential for intra-regional FDIneeds to be exploited more fully. InSoutheast and East Asian countries,the bulk of FDI inflows are actuallyintra-regional inflows. ASEANcountries have adopted severalmeasures to complement theirattempts to evolve an ASEAN FreeTrade Area (AFTA) (see Box 5.1).

Secondly, FDI inflows are alsoaffected by the trends in themacroeconomic performance of apotential host economy. In particular,the growth rate of an economy or ofindustrial sector may act as a signalingdevice on the potential of the economyand pull more FDI. A recent analysisfor India has found a broad

Figure 5.2: FDI Inflows as aProportion of Gross Fixed

Capital Formation

correspondence between the industrialgrowth rates in a year and FDI inflowsreceived in the following year (seeFigure 5.3). Apparently, good industrialperformance tends to crowd-in FDIinflows as well. This means that, in thelight of recent improvement in thegrowth outlook for the South Asianregion as projected in Chapter 3, FDIinflows to the region should be rising inthe coming years.

Finally, it has been observed thatSouth Asian countries may be under-reporting the FDI inflows received bythem. For instance, the recentdiscussion on comparisons betweenIndia and China as the destinations ofFDI has highlighted the measurementdifferences. Despite the recent increasein FDI inflows received by Indiafollowing the reforms, India’s sharewould appear too small, especially if itis compared with that of other countriesin the region such as China. In 2001,India’s reported inflows of about $ 3.4billion represent a mere 1.7 per cent oftotal inflows attracted by developingcountries. In contrast, China receivedan estimated $ 46.8 billion of inflowsrepresenting nearly 23 per cent of totaldeveloping country FDI inflows.

It has been pointed out, however,that the figures of FDI inflows in Indiaand China are not comparable because

of several differences.3 Firstly, theIndian figures of inflows do notfollow the IMF’s BOP Manual that isfollowed internationally. The principaldifference is that Indian figures onlycount the fresh inflows of equity anddo not take into consideration thereinvested earnings by foreignaffiliates in the country nor the inter-corporate debt flows that are generallyincluded while computing the FDIfigures as per the IMF Guidelines.Therefore, the Indian figures tend tounderreport the inflows. Secondly, FDIinflows in China are believed to beoverestimating the real FDI inflows inview of round-tripping of Chinesecapital to take advantage of morefavourable tax treatment of FDI.Therefore, the figures of India andChina are not strictly comparable andtend to overplay the difference betweenthe intensity of inflows between the twocountries. The reported figure of FDIinflow in China in 2000 as a proportionof GDP is 3.6 per cent compared to0.5 per cent in the case of India.However, when the Indian figures arerevised by taking into account thereinvested earnings and inter-corporatedebt and Chinese figures are moderatedon account of possible round-trippingof FDI inflows (using the estimatesprovided by the International Finance

Figure 5.3: Rate of Industrial Growth (left scale) andFDI Inflows (right scale)

Source: Kumar (2003).

-2

0

2

4

6

8

10

12


2002200120001999199819971991-1996




indicates the decline in FDI coming toBangladesh over the period. Thecountries from which the foreign directinvestment was received were the U.S.,U.K., Hong Kong, Norway, Malaysia,India, Germany.5

Table 5.4 shows the sectoralallocation of FDI for India for theperiod 1991 to 2002.6 From the tablewe see that the highest recipient sectorof FDI in the period 1991 to 2000 hasbeen the electrical equipment sectorwhich includes computer softwareand electronics. This is followed bythe telecommunication sector andtransportation sector. Thus, in Indiaalso the service sector has emergedas a major recipient of FDI. Thecountries from which the FDI flowshave originated include the UnitedStates of America, Japan, UnitedKingdom and Germany.

Unlike Bangladesh and India,wherein service sector attractssubstantial FDI, in Pakistan this sectoris not prominent (see Table 5.5). Forexample, in 1999-00 the sectorsreceiving the largest FDI werechemicals, pharmaceuticals andfertilizers. However, in 2000-01 trade,transport, storage and communicationsector held the largest share. In thelast year as shown in Table 5.5,mining, quarrying and oil and gas havereceived the largest share. Thecountries from which the FDI was

Corporation), the gap in the FDI/GDPratios narrows to 1.7 to 2.0 for Indiaand China respectively. The IndianGovernment has taken steps to revisethe definition of inward as well asoutward FDI flows in the country. ACommittee set up by the Reserve Bankof India in its report submitted inOctober 2002 had recommended theIndian definition be brought at par withthe global practice. In June 2003, theGovernment of India announced thatadoption of international norms led tonear doubling of FDI inflow figuresfrom US$ 2342 million to $4029million in 2000/01 and from $3906million in 2001/02 to $ 6131 million.4

5.4. Sectoral Patterns in FDIInflows: Services in the LeadA broad look at the sectoraldistribution of FDI in majoreconomies of the region would revealthat the service sector has receivedthe bulk of FDI inflows commensuratewith its rising importance in the SouthAsian economies as observed inChapter 3.

Table 5.3 shows the FDI flows bysectors in Bangladesh for the period1996-97 to 2002-03. From the table wesee that the sectors receiving the largestshare of FDI in Bangladesh are theservice sector, followed by chemicals,textiles and food sector. The table also

Table 5.3: FDI Flows to Sector 1996-97 to 2002-03 in Bangladesh

(in US$ million)

Sectors 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03a

Agriculture related 15.90 7.95 63.65 5.95 0.72 0.26 27.30Food 48.89 346.47 19.97 2.41 0.62 4.34 2.61Textiles 106.91 92.76 50.28 41.03 201.57 50.64 2.64Print and publishing 9.00 0.00 2.00 0.18 122.01 2.35 0.58Leather and rubber 4.05 21.09 8.62 0.63 0.00 - 0.36Chemicals 113.64 53.85 336.51 962.43 201.35 44.84 2.27Glass, ceramic and related 0.00 99.39 53.26 142.13 17.11 5.30 0.84Engineering 21.31 10.62 96.84 20.98 29.77 57.86 21.68Services 596.59 2279.30 1290.85 770.99 650.70 137.56 42.27Miscellaneous 137.21 528.62 3.56 172.27 48.03 0.98 112.00Total 1053.50 3440.05 1925.54 2119.88 1271.88 304.15 212.55

Source: www. gobfinance.org/economic /index.htmla Upto March 2003.

Table 5.4: Amount of FDI Inflows and Percentage of Total inIndia during August 1991 to October 2002

Sectors Amount of FDI inflows Per cent age(US$ Million) of total

Energy 1813 10.4

Telecommunication (radio paging, cellular mobile, 2259 12.9 basic telephone services)

Electrical equipment 2448 13.9 (including computer software and electronics)

Transportation industries 1984 10.8

Service sector 1573 8.3

Metallurgical industries 252 1.4

Chemicals other than fertilizers 1316 6.7

Food processing 788 4.0

Hotels and tourism 138 0.8

Textiles 290 1.5

Source: Economic Survey 2002-03, Government of India



received include the United States,United Kingdom and the U.A.E.7

5.5. FDI and GlobalProduction Network inSouth AsiaThe recent literature has shown that allthe flows of FDI do not benefit theirhost countries in a similar manner.There is indeed a great variation in theextent of capital, entrepreneurship,technology, market access brought bythem. Some may actually bring prettylittle, if at all. Therefore, the qualityof FDI is equally important as thequantity of inflows.8

In particular, export-orientation ofFDI inflows could be an indicator ofthe quality of FDI especially fordeveloping regions like South Asia,among many others. Evidently, theEast and Southeast Asian countrieshave been able to expand theirmanufactured exports by serving asthe base for export-platformproduction by MNEs or being part ofthe production sharing networks ofmultinational companies ortransnational companies (TNCs) (seeBox 5.1). For instance, MNEs accountfor as much as 45 per cent of allmanufactured exports in China and asmuch as 81 per cent of hightechnology exports. MNEs, on the otherhand, play a marginal role in SouthAsia’s exports. Another respect in which

besides low levels of development,urbanization and poor quality ofinfrastructure, geographical and culturaldistances with major source countriesof FDI, the South Asian countries sufferfrom not being part of any regionaleconomic integration scheme or havingpreferential trade arrangements with oneof the sources of FDI9 (see Box 5.1).However, intensification of regionaleconomic integration with a quickimplementation of SAFTA andeventually a customs union may helpthe region improve its attractiveness toFDI inflows from the outside worldbesides unleashing the potential of intra-regional flows.

5.6. Concluding RemarksThis chapter has reviewed theperformance of South Asia in terms ofits attractiveness for FDI inflows andtheir quality. FDI inflows to South Asiahave grown over the past decade inresponse to policy liberalization. SouthAsian countries have also been able toincrease their share in FDI inflowsreceived by developing countriesespecially since the year 2000. However,their share is still rather marginal whichis attributed to a number of factors such

Table 5.5: FDI Received by Pakistan 1999-00 to 2001-02 (US $ Mn.)

Sector 1999-00 2000-01 2001-02

Power 67.4 40.3 36.4Chemical, pharma and fertilizers 119.9 26.3 17.8Construction 21.1 12.5 12.8Mining and quarrying, oil and gas 79.7 84.7 274.8Food, beverage and tobacco 49.9 45.1 -5.1Textiles 4.4 4.6 18.4Trade, transport, storage and communication 38.6 94.7 68.3Machinery other than electrical 4.6 2.5 10.5Electronics 2.3 2.8 15.9Financial business 29.6 -34.9 3.6Petrochemical and refining 12.0 8.7 5.0Cement 0.1 15.2 0.4Others 40.3 20.0 25.9Total 469.9 322.4 484.7

Source: Economic Survey of Pakistan 2002-03.

Box 5.1: Production Sharing in East Asia

Intraregional trade in East Asia is increasingly characterized by “production sharing”,defined as the decoupling of previously integrated goods into their constituent parts, componentsand accessories (PCAs) which in turn are distributed across countries on the basis of comparativeadvantage.10 Other terms sometimes used in the international economic literature to describethis phenomenon include “intra-product specialization”, “international product fragmentation”,“delocalization”, “disintegration of production”, “Heckscher-Ohlin (HO) plus productionfragmentation”, “slicing the value chain” and “super-specialization”.11 The international businessliterature has used terms such as “global commodity chains” or “fragmentation of value chains”to describe this phenomenon. This sort of cross-border multi-staged production process has inturn been facilitated immensely by major improvements in transportation, coordination andinformation communication technologies (ICTs).

While production sharing has been used extensively in commodity trade (consumer goodslike garments, footwear, toys, handicrafts) for decades12, it is now being applied more intensivelyto trade in airliners, computers, semiconductors, automobiles, and many other products.13

This said, there are some important distinctions between “old” or “buyer-driven” productionsharing and “new” or “producer-driven” production sharing (see Table 1).

The growth of PCA trade involving developing economies has outpaced growth inmanufactured trade in general and aggregate trade as well. Thus, PCA exports involvingdeveloping economies rose from 13.2 per cent of total exports in 1981-90 to 18.5 per cent in1990-2000. The share of developing economies in global PCA exports increased from a mere 4

Box 5.1 continued


they have failed to exploit the potentialof FDI is to serve as a base for export-platform production by MNEs. Export-oriented FDI is a special type of FDIand is known to be of a footloose nature.It moves from place to place as thecomparative advantage of countrieschanges, as argued in the flying geesetheory. A recent study has looked at theprospects of South Asia becoming afavoured destination for Japanese FDI,especially one that is export-oriented inthe light of an analysis of determinantsof their location. It has been found that


per cent in 1981 to 21 per cent in 2000. As noted by the World Bank14, developing economies’ involvement in global production networks hasoffered them the opportunity to raise their share of the world’s fastest-growing export products (transistors and semiconductors, computers,and computer and office machine parts) from 2.4 per cent in 1980 (about the same as the share of those products in global exports) to 16.3 percent by 1998 (almost 7 percentage points higher than the share of such products in global exports).

Nonetheless, trade of PCAs involving developing economies is highly concentrated, far more than total trade or manufactured goods trade ingeneral (Figure 1). According to the World Bank15, nine of the top ten developing economies are from East Asia (except Brazil). South Asia, Sub-Saharan Africa, and the Middle East and North Africa together account for only 2 per cent of developing economies’ PCA exports (and two-thirdsof that involves just two countries, India and South Africa), compared with 11 per cent of developing economies’ total manufactured exports.

To a large extent this concentration of PCA trade in a handful of countries in East Asia is not altogether surprising, being a reflection of theconcentration of export-oriented foreign direct investment (FDI) in core countries. After all, production sharing has been facilitated immenselyby the expansion of the global operations of transnational corporations (TNCs) and consequent FDI. According to the UNCTAD16, globalmarkets increasingly involve competition between production systems that are organized by TNCs.

This is not to suggest that cross-border production sharing always requires TNCs. In cases where there are no obvious benefits from“internationalization”, outsourcing could also be conducted at “arm’s-length” between independent actors, i.e. separation of ownership. TNCsplay a major role in production sharing involving semiconductors, automobiles and the like, while arms-length transactions are more common inthe case of textiles and footwear and related products (see Table 1 again).

Table 1: Main Characteristics of Producer-driven versus Buyer-driven Production Sharing

Producer-driven Buyer-drivenProduction Sharing Production Sharing

Drivers Industrial capital Commercial capital

Core competencies R&D, production Design, marketing

Barriers to entry Economies of scale Economies of Scope

Economic sectors Consumer durables, intermediate goods, capital goods Consumer non-durables

Typical industries Automobiles, computers, aircraft, semiconductors Apparel, footwear, toys

Ownership of TNCs Local firms, predominantly in developingManufacturing firms economies

Main network lines Investments-based Trade-based

Predominant structure Vertical Horizontal

Source: Based on G. Gereffi (2001). “Shifting Governance Structures in Global Commodity Chains, with Special Reference to the Internet”, American BehavioralScientist, 44, pp.1616-37.

The importance of production sharing is that by reducing the costs of production of a product it makes the entire set of countries that participatesin the integrated production system more attractive as export markets and investment destinations — a win-win arrangement for all participants.Lower income developing economies are not only able to gain a comparative advantage in lower-end light industries, but also in the lower-endproduction stage of higher-tier industries. Middle and higher income developing country are able to graduate to higher ends of the value-added chain,i.e. more advanced stages of the Original Equipment Manufacturing (OEM) and eventually into Original Design Manufacturing (ODM). Countriescould also move horizontally, e.g. improve product quality and serve higher value added market segments. This so-called Original Brand Manufacturing(OBM) essentially involves moving from selling under a foreign label to developing and selling under their own label, hence allowing them to capturebrand name rents. Hong Kong has done this effectively in the case of apparels, with many labels being produced by Hong Kong brands. Othereconomies in the Asia-Pacific region are developing their own “brand names” in computers and electronics.

On the plus side, the splitting of goods into finer sub-parts which are then outsourced is a means of including more countries in theproduction network (i.e. multiplication of supplier networks). On the minus side, in view of the footloose nature of such production, there arewell-founded concerns that small variations in costs could lead to large swings in comparative advantage thus necessitating large and suddendomestic adjustments.

Production sharing is not limited to trade in goods as TNCs have fragmented and dispersed various services functions worldwide to takeadvantage of marginal differences in costs, resources, logistics and markets. In the Asia-Pacific region, Singapore and India have benefitedsignificantly as many TNCs have used the former as a regional headquarter (RHQ), given the city state’s excellent infrastructural quality,political stability, low tax regime and strategic location; while they are increasingly using the latter for their backroom and related operations inview of the ready availability of excellent, low cost, high quality skilled labour.

The growing significance of production sharing emphasizes the need for governments seeking export-oriented FDI “to go beyond trade andFDI policies and assess their locational advantages in the international production system context”17 . It is in this sense that regional integrationefforts that lower the costs of cross-border transactions can be an especially attractive tool to promote trade, FDI and technological progress.Indeed, it is not surprising that Japanese and other businesses have been among the most enthusiastic proponents of the ASEAN Free TradeArea (AFTA) and ASEAN Investment Area (AIA).

Source: Ramkishen S. Rajan (2003c).

Box 5.1 continued



as low income levels, poor quality ofinfrastructure, their geographical andcultural distance with major sources ofcapital in the West or the East. Theyhave also not exploited the potential ofintra-regional FDI inflows whichaccount for the bulk of FDI inflowswhich received by the Southeast Asiancountries.

South Asian countries have alsonot been able to integrate themselveswith global production networks ofmultinational corporations and emergeas bases for export-orientedproduction for them in a significantmanner. Participation in regionaleconomic integration schemesemerges as a major determinant forhosting such offshore productionbases by MNCs.

In this context, South Asia couldtake lessons from experiences ofASEAN that are trying to attractexport-oriented FDI with the help ofAFTA and ASEAN Investment Area.Regional economic integration inSAARC will also enable the region notonly to emerge as a more attractivedestination for FDI inflows in generalbut also export-oriented FDI as wellas intra-regional FDI.

Endnotes1 Kumar, 1998.2 See Kumar, 2000; 2002, for details.3 It was first noted by IFC, Washington in 2002;

see Pfefferman, 2002.4 See Government of India Press Note dated 30

June 2003, DIPP, Ministry of Commerce andIndustry.

5 From www.gobfinance.org/economic/index.html

6 Economic Survey 2002-03, Government of India

7 Economic Survey 2002-03, Pakistan8 See Kumar, 2002 for a discussion on the

patterns and determinants of quality andquantity of FDI.

9 See Kumar 1998 for an empirical evidence.10 The term “production sharing” was coined by

F. Ng and A. Yeats, 1999. “Production Sharingin East Asia: Who Does What for Whom, andWhy?”, Policy Research Working Paper No.2197,The World Bank.

11 For references, see R. Rajan, 2003a; 2003b.12 For instance, see G. Gereffi, 1999; 2003.13 In line with the increasing significance of

production sharing, there is a growing bodyof analytical literature on the subject. See thecollection of papers in S. Arndt and H.Kierzkowski (eds.) 2003.

14 World Bank, 2003.15 ibid.16 UNCTAD, 2002.

ReferencesArndt, S. and H. Kierzkowski (eds.). 2003.

Fragmentation: New ProductionPatterns in the World Economy, NewYork: Oxford University Press.

F. Ng and A. Yeats. 1999. “Production Sharingin East Asia: Who Does What for Whom,and Why?”. Policy Research WorkingPaper No.2197. The World Bank.

Government of India. 2003. Press Note. NewDelhi: DIPP, Ministry of Commerce andIndustry. 30 June.

Gereffi, G. 1999. “International Trade andIndustrial Upgrading in the ApparelCommodity Chain.” Journal ofInternational Economics, 48, pp.37-70.

Gereffi, G. 2001. “Shifting GovernanceStructures in Global Commodity Chains,with Special Reference to the Internet.”American Behavioral Scientist, 44,pp.1616-37.

Kumar, N. 1998. “Liberalisation and ChangingPatterns of Foreign Direct Investments:Has India’s Relative Attractiveness as aHost of FDI Improved?”. Economic andPolitical Weekly. 30 May: 1321-29.


Kumar, N. (ed.). 2000. Indian Economy underReforms: An Assessment of Economicand Social Impact. New Delhi: Bookwellfor Research and Information Systemfor the Non-Aligned and OtherDeveloping Countries.

Kumar, N. 2002. Globalisation and Quality ofFDI : A Quantitative Analysis of the Roleof Host Country Characteristics andWTO Regime. Delhi: Oxford UniversityPress.

Kumar, N. 2003. “Liberalization, ForeignDirect Investment Flows and EconomicDevelopment: The Indian Experience inthe 1990s”. RIS Discussion Paper No.64 . New Delhi: Research andInformation System for the Non-Aligned and Other DevelopingCountries.

Pfeffermann, G. 2002. ‘Business Environmentand Surveys, Paradoxes: China Vs.India’ presentation made at 2002 PSDForum Session on Investment climateassessment methodology: the investmentclimate in India and China- which isbetter? http://rru.worldbank.org/psdforum/forum2002/documents/Pfeffermann.ppt.

R. Rajan. 2003a. “Economic Globalization andAsia: Trade, Finance and Taxation”.ASEAN Economic Bulletin, 18, pp.1-11

R. Rajan. 2003b. International EconomicPolicy Issues in Asia: Essays onGlobalization, Finance and Trade.Singapore: World Scientific Press(forthcoming).

R. Rajan. 2003c. “Production-Sharing in EastIndia: Implications for India.” Economicand Political Weekly. September 6, p.3770-72.

UNCTAD. 2002. World Investment Report2002, New York and Geneva: OxfordUniversity Press.

World Bank. 2003. “Global EconomicProspects and the Developing Countries2003”, Washington, DC: The WorldBank, Chapter 2.


6.1. Introduction

During the past decade and halfregional economic integration has

been adopted as a strategy fordevelopment and strengthening externalcompetitiveness by both developed anddeveloping countries. Thus strong tradeblocs have emerged, viz. EU, NAFTAMERCOSUR, COMESA, SADC, SACU,AFTA, among others. South Asia has alsoevolved a SAARC Preferential TradeArrangement (SAPTA) since 1995under the framework of SAARC as atransition to SAARC Free Trade Area.This has been complemented by severalattempts at bilateral and sub-regionallevels to liberalize trade in the region.Therefore, slow progress in SAARCneed not be misconstrued as lack ofintra-regional trade and investmentdynamism in the South Asian region.

An important point emerging fromthe analysis in this Chapter is that thereis a tendency of trade-investmentlinkages getting strengthened in theregion. This is expected in a region likeSouth Asia wherein imbalances on tradeaccount, due to limited export supplycapabilities in some countries, getcompensated by investment inflows onthe capital account.

The formation of FTA withliberalization of investment regime andother facilitating measures can help inexploitation of the potential ofefficiency-seeking restructuring ofindustries within the region. Thisincludes rationalization of industries onthe basis of overall efficiency by takinginto account the special advantages ofdifferent locations across the region interms of availability and relative cost oflabour and skills, natural resources, andother factors.1

The regional trade liberalizationunder the aegis of SAARC isdocumented and analyzed in Section 2.The sub-regional approaches are dealtwith in Section 3. The contours ofbilateral economic cooperation in theregion are analyzed in Section 4. Section5 highlights broad contours of monetarycooperation. Some of the lessons fromthe regional cooperation initiatives so farand policy implications for inductinggreater trade and investment dynamismin the South Asian region are laid downin the last section.

6.2. Regional EconomicIntegration under SAARCThe process of trade liberalization underthe SAARC framework has been rather

slow as compared to the progress madeat the bilateral and sub regional fronts.This is despite the fact that SAARC hasrecognised the rationale for regionaleconomic integration (Box 6.1) and hasset for itself quite ambitious targets interms of achieving a dynamic SAPTAto begin with and further transitioningto SAFTA and ultimately an EconomicUnion in future. An attempt has beenmade in this section to review the trendsin intra-SAARC trade and investment,progress in the policies for SAPTA andSAFTA as well as the move towards anEconomic Union.

Intra-SAARC TradeThe trade cooperation under SAARChas been subjected to severe criticismas intra-SAARC trade as a proportionof SAARC’s total trade has remainedlow at around 4 per cent. However, ithas been pointed out that this shareappears low due to the fact that asubstantial part of intra-SAARC tradeis at present taking place as informaltrade or is routed through thirdcountries. If share of informal tradecould be taken into account, the shareof intra-regional trade could be easilytwice as much as revealed by officialtrade figures.2 Secondly, intra-regional

Regional Economic Integration inSouth Asia:Lessons from Different Approaches

6



trade is quite substantial for someespecially smaller countries in the regionsuch as Bangladesh, Nepal, Maldives.

SAPTAAlthough SAPTA has been a recentexperiment in liberalizing intra-regionaltrade, the results are significant. It isworth noting that under SAPTA it is thesmaller countries that have experiencedtrade gains as the studies have observed.For instance, during the period 1996-97to 2000-01 it has been found that importliberalization by India under SAPTA hasstimulated preferential imports fromBangladesh both in value and share terms.In case of Maldives, the share hasimproved even though the value hasdeclined during the same period.3 It hasalso been observed that the preferentialtrade basket under SAPTA isincreasingly getting diversified.4

As we shall observe later in thischapter, trade-buoyancy is alsomanifested in the Indo-Sri Lanka andIndo-Nepal relationships due to tradeliberalization measures under the bilateralframework. In short, trade liberalizationhas resulted in gains to smaller countriesof the region whether the liberalizationis effected through the bilateral routeor regional process. This is contrary tothe understanding that regionalcooperation/bilateral cooperation leadsto larger gains to bigger countries.

The Second Meeting of the Inter-Governmental Group on TradeLiberalization to Conclude the FourthRound of Trade Negotiations underSAPTA was held at the SAARCSecretariat, Kathmandu on 30 October-1 November 2002. At this meeting theFourth Round of SAPTA negotiationswere finalized. Though the deliberationsfocused on sector-wise, chapter-wiseand across-the-board negotiations, theoutcome has been in terms of mutuallyagreed concessions between India andBangladesh and India and Maldives atHS-6 Digit Level. India offered tariffconcessions in 107 items to Bangladeshand on 4 items to Maldives at HS-6digit level. On the other hand,

Regional Economic Integration in South Asia

Box 6.1: The Logic of Cooperation in South Asia

Enhanced regional cooperation, including regional integration, is an imperative if the SouthAsian countries are to strengthen their competitive position, both individually and as a group,so as to attract foreign private capital from outside and even within the region to widen anddiversify their production base. Such a process would help reduce the vulnerabilities of theirindividual economies in the face of the inexorable and accelerated pace of globalization, and tomaximize the benefits and minimize the costs of this process.

There is an increasing convergence in the macro-economic policy regimes of the SouthAsian countries, with an enhanced emphasis on the role of the private sector. All these countrieshave embarked upon the path of liberalisation of their economies as a means of improvingproductivity and efficiency, with expectations of gains in competitiveness. The liberalizationprocess has demonstrated the comparative advantage these countries have in trading with eachother and has proved to be a powerful engine for the expansion of intra-regional trade.

However, this expansion has been unequal in its scope in that the more developed membersof SAARC have been able to dramatically expand their exports within the region. In contrast,the export growth within the region of the least developed countries has been modest, limitedas they are by their narrow production structures and supply constraints. There is a legitimateapprehension that the recent spurt in intra-regional trade may thus be unsustainable and thepotentialities for future growth may not be realized unless this imbalance in the trade flows isat least partially redressed. This can be best achieved by an integration of the markets andcoordinated restructuring of the economies of the member states.

South Asian countries have certain inherent advantages in regional cooperation. Theyhave the advantage of geographical contiguity and shared economic, social and culturalcharacteristics, which should serve to reduce the transaction costs. They also have aninherited development infrastructure, even if it has not been upgraded over the years.With its combined population of 1.3 billion, South Asia commands a huge potentialmarket. If these countries are able to sustain the current dynamism in their economiesand raise the purchasing power of the large proportion of their populations who livebelow the poverty line, such a market could grow exponentially to a point where itwould be coveted by the rest of the world, and could thereby, attract significantly largerflows of foreign capital and technology than has thus far been possible. Production for suchan enlarged market will yield economies of scale and improve the competitive advantage of thecountries of the region. The least developed members states would, in particular, be the biggestgainers through their access to an integrated and expanded regional market, which will providethem with opportunities to attract FDI to service the regional market. What is needed is toenlarge, integrate and unify this market by removing barriers to trade and to take other measuresfor ensuring greater regional integration.

The structural changes brought about in the production pattern in the member statesthrough coordinated development of the region’s immense natural as well as human resources,its strong traditional knowledge base and its enormous land, water and other natural resourceswill stimulate growth and employment within the respective economies, thereby enhancingthe welfare of the people of South Asia.

In order to realize the full potential of regional cooperation, SAARC will need to moveforward to avail of the vast opportunities of deeper regional integration which are beckoningthe South Asian countries. Recent studies conducted by research institutions and businessorganizations of the region have brought out the colossal cost of non-cooperation in the coreeconomic areas. This cost is rising with every passing day. In the meantime, the basic parametersand paradigms driving the integration of the South Asian countries with the outside world havechanged beyond recognition in ways which have imposed asymmetric costs and benefits onthe member states. The South Asian countries can cope with these changes more effectively ifthey can address some of these issues as a cohesive regional group rather than as individualcountries. They, therefore, cannot afford to lose any more time in taking more decisive stepstowards regional integration and deepening regional cooperation.

Given the above reality, the goal of the SAARC member states should be to establish aSouth Asian Economic Union by the year 2020.

Source: SAARC Vision Beyond the Year 2000: Report of the SAARC Group of Eminent Persons, Kathmandu,(1998).


Bangladesh has given concessions toIndia on 29 items whereas Maldives hasextended concessions on 4 items. In arecent development, India and Pakistanare also planning to negotiate andconclude their fourth round of bilateralcommitments under the SAPTA.

SAFTAThe Committee on EconomicCooperation (CEC) in its EleventhMeeting in Kathmandu during 26-27October, 2002 considered the Report ofthe Committee of Experts (COE) onDrafting a Comprehensive TreatyRegime for a South Asian Free TradeArea that was held at the SAARCSecretariat on 15-17 July 1999.

The Committee underlined theurgency of finalizing the text of theDraft SAFTA Treaty Framework by theend of 2002 as mandated by the EleventhSAARC Summit. The SAFTA Treaty isin the final stage and it is likely to betaken up at the Summit Meeting of theSAARC which is scheduled to be heldin Islamabad from January 4-6, 2004.

In terms of substantive issues, anti-dumping measures, rules of origin andrevenue compensation mechanism stillrequire to be sorted out within theSAFTA Treaty Framework. In addition,product negotiation modalities andidentification of sensitive and negativelist of items to safeguard trade interestsare yet to be finalized.

However, it must be pointed out thatwhile the SAFTA process has been notonly slow but various deadlines forlaunching it have been missed, otherregions in the world have been movingon a fast track basis in terms of freeingtheir trade and customs regimes like inthe case of ASEAN Free TradeAgreement (AFTA) the schedule forachieving it has been preponed from2008 to 2003 and further to 2002 forthe six original signatories.

Gains from SAFTA: SomeEstimatesSAFTA is expected to expand intra-regional trade not only by legalizing the

substantial unofficial trade in the regionbut it is also expected to generatesubstantial new trade (trade creation).However, such gains are considered inthe literature as static gains. Within adynamic5 framework it is argued thatdue to economies of scale effectultimately the manufacturing processesexperience gains in terms of costreductions.

Studies conducted in theframework of gravity model haveestimated that complete elimination oftariffs under SAFTA may increase theintra-regional trade by 1.6 times theexisting level.6 Furthermore, it has beenfound that in the dynamic frameworkthe gains from liberalization aresubstantially (at least 25 per cent) higherthan the static gains.7 It is also importantto highlight that such scale effectswould largely accrue to the smallermember countries of the SAARC dueto the possible expansion in their scaleof operation by getting access torelatively larger markets of the largermember countries.

The above projections need to beviewed against the cost of non-cooperation which was estimated byan earlier RIS study which worked outto be about $ 266 million for SriLanka. This was on account of SriLanka’s imports from outside SAARCregion despite the fact that those itemswere available within the South Asianregion. Similarly, for Pakistan theestimated cost of non-cooperation wasto the tune of $ 511 million.8 It may bestressed that the available difference inunit values of items between theSAARC-sources of imports and extra-SAARC sources is not necessarily dueto quality differences and it could beinterpreted as trade creation effects.To illustrate this point one may citethe example of the Indian made Hero-Honda motorcycle which can bepurchased in the Sri Lankan marketat Sri Lankan Rs. 78,000 compared tothe original Honda motorcycle fromJapan at Rs. 1,49,000. Similarly, theprice difference between Indian

motorcycle, Kawasaki-Bajaj and theoriginal Kawasaki motorcycle fromJapan is substantial as the former costsSri Lankan Rs. 73,665 and the lattercosts Sri Lankan Rs. 1,60,000.9

Intra-SAARC InvestmentLinkagesAs highlighted in the beginning of thisChapter in a regional grouping like theSAARC strengthening of trade-investment linkages is a pre-requisitefor achieving economic successbecause of the fact that trade deficitsbetween bigger and smaller countriesneed to be compensated by capitalaccount surpluses wherein outward-FDI from bigger to smaller countriestakes place. This kind of linkage helpsimproving export supply capabilitiesof the smaller countries and in thesecond round there are favourabletrade effects.

It has been empirically demonstratedthat the transfer of resources andtechnology through South-South jointventures is more appropriate and costeffective for the receiving country thansimilar transfers effected by TNCs basedin the industrialized countries. Forinstance, the technology transferred tojoint ventures has been found to beappropriately scaled down to smaller size,made more appropriate to factorendowments of developing countries,and adapted to local raw materials andmarket conditions. They have beenfound to depend less on imported capitalgoods and raw materials and result insignificantly lower foreign exchangeoutgo on account of servicing.10

Furthermore, joint ventures cansupplement and promote South-Southtrade. Joint ventures with buy-backarrangements with the home countrycan help in correcting the perennialbalance of trade imbalances which mayemerge because of limited exportcapabilities of host countries.

However, the intra-SAARCinvestment linkages are very low andthe situation suggests that the SAARCcooperation must focus on this



dimension to take advantage of trade-investment relationship by enhancing theproduction and trading capabilities of theSAARC countries. On the other hand,the potentials for investment cooperationin the South Asian region appear to bequite high due to investmentcomplementarities and reforms in theinvestment regimes in the countries ofthe region.

Scope for intra-South AsiaInvestment CooperationThe scope for intra-South Asiainvestment cooperation for augmentingregional investment flows is immense.Box 6.2 presents the results of anexercise in this direction by taking thecase of textile and clothing. There arediscussions for ‘developing South Asianregion as the lowest-cost manufacturinghub in the world’. In order to achievethis objective some of the areasidentified are trade, investment andservices including health, education,entertainment and communication.

6.3. Subregional InitiativesComplementing the regional, bilateraland unilateral initiatives in the SouthAsian Region are two important subregional initiatives, viz. Bangladesh-Bhutan-India-Nepal QuadrilateralGrowth Initiative (BBIN) andBangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation(BIMST-EC). Earlier RIS studies havehighlighted that the Growth ZonesApproach adopted for the developmentof a sub-region can become animportant mechanism in achievinghigher levels of regional integration inSouth Asia.11 The Growth ZonesApproach provides the necessaryflexibility to exploit the economiccomplementarities within a specific sub-region. They have proved to beimportant export bases in other partsof Asia. A major advantage of theapproach is in terms of creating linkageswith the rest of the economy as well aswith the rest of the region but with theaim of targeting the global market.

Box: 6.2: Regional Cooperation in Textiles and Clothing:Possibilities of Horizontal Specialization

It has been observed that while the WTO Agreement on Textiles and Clothing aims atMFA phasing out, its implementation process so far has not resulted in adequate integrationof products belonging to this sector. Moreover, the ATC is back loaded and this keeps theentire integration process under serious doubts. Even if the phasing out schedule is metadequately it is apprehended that due to non-availability of an assured market in developedcountries through quotas, the South Asian countries would have to take concerted policy andbusiness decisions so as to meet the global competition from other developing as well asdeveloped countries since this is one of the most important sectors of the South Asiancountries.

In order to help the South Asian countries meet the global challenges of competition inthis sector, it is suggested that they aim for regional integration of this sector, especially withthe help of strengthening trade-investment linkages. In order to find out the possibilities ofefficiency-seeking industrial restructuring in this sector (RIS, 2003a) an attempt is made toidentify products for this purpose. The argument is to induct horizontal integration, i.e.cooperation in the same or similar lines of production and exports, among the South Asiancountries. As per the industrial restructuring on a pan-South Asian basis, a particular SouthAsian country which has gained export specialization in certain textiles and clothing productlines in recent times, could become the host of relocated plants of the other South Asiancountries. In this manner, the textiles and clothing sector could become regionally integratedsector as countries would vacate certain lines of production and gain in other lines of productionaccording to their relative comparative advantage in the global market. Such a restructuringwould engender intra-South Asian investment flows that would be trade-creating vis-à-visthe global and regional markets. So that South Asian countries do not lose out on the value-addition chain, focus has to be given on horizontal specialization to begin with. In subsequentphases, vertical integration in this sector could also be contemplated.

The products amenable for horizontal specialization in different lines of production andexports from one South Asian country to other partners of the region are identified byanalyzing the trends in the revealed comparative advantage of each country at the SITC 4-digit level during 1996-2000. In so doing, different stages of processing were kept in mind,i.e. from raw cotton and fibres to yarn and fabrics; and further to clothing. The analysis hasbeen undertaken at a three-dimensional level. First, products were identified where a particularSouth Asian country has gained comparative advantage during the period under consideration.Second, products were identified where a particular South Asian country has lost comparativeadvantage in the global market for the same period. And third, products were identifiedwhere major other developing country-competitors have also gained comparative advantageduring the same period. This included countries like China, Hong Kong, Indonesia, Thailand,Turkey, Mexico, Tunisia, etc.

Finally, a matching of three vectors of products for each South Asian country wasundertaken and the possible direction of industrial relocation from one country of the regionto other partners was identified. The results of this exercise reveal that each South Asiancountry is amenable for such a restructuring in terms of horizontal specialization. Eachcountry can become a host of industrial relocation as well as it is also required to shift someof its manufacturing bases to other partners. While the focus of analysis has been to identifyproducts for horizontal specialization, it was also shown these are possibilities of verticalintegration as well – from one stage of processing to another according to comparativeadvantage in the value-addition chain.

The upshot of the above is that regional cooperation for bringing trade-investment linkagesinto the policy-focus can induct a spate of efficiency-seeking industrial restructuring throughintra-South Asian FDI flows in the textiles and clothing sector. Resultantly, the overallcompetitiveness of this sector would be enhanced to meet the challenges of MFA-phasingout.Source: RIS based on RIS Discussion Paper by Ram Upendra Das (forthcoming).


Since Growth Zones are export-oriented, the size of the domestic marketdoes acts as a limiting factor in the

pursuits of harnessing economiccomplementarities of different countriesin the region.12


Bangladesh-Bhutan-India-NepalGrowth Quadrangle Initiative(BBIN-GQ)Sub regional cooperation, based onlaunching of specific projects, involvingthree or more member states is beingpursued under the SAARC, in terms ofthe Growth Quadrilateral Initiativecomprising Bangladesh, Bhutan, Indiaand Nepal (BBIN).

The prime objective of the BBIN-GQ is to create an enabling environmentfor rapid economic development throughthe identification and implementation ofspecific projects. The following sectorshave been identified for priority attention:multi-modal transportation andcommunication, energy, optimal andsustainable utilization of natural resourceendowments, trade and investmentfacilitation and promotion, tourism andenvironment.

It has been found by a recentstudy13 that there is immense trade andinvestment potential among the BBINcountries that could serve asinstruments for the development of thesub-region. The study hasrecommended to propel growth anddevelopment in the BBIN sub-regionsuch as establishment of a BBIN-FreeTrade and Payments Arrangement,BBIN Investment Area, BBIN IntegratedSectors, BBIN HRD Centre/HumanResource Bank, BBIN Banking Enclave,BBIN Information Hub and StatisticalSystem, and a BBIN Secretariat. Thisstudy has formed the basis forintensifying cooperation especially in thetransport and transit sectors amongthese countries by the AsianDevelopment Bank under its South AsiaSub-regional Economic Cooperation(SASEC) Programme.

BIMSTECThe initiative to establish Bangladesh-India-Sri Lanka-Thailand EconomicCooperation (BIST-EC) was taken byThailand in 1994 to explore economiccooperation on a sub-regional basisinvolving contiguous countries of SouthEast and South Asia bound by the Bay

of Bengal. With the admission ofMyanmar in December, 1997 theeconomic cooperation was renamed asBIMST-EC (Bangladesh-India-Myanmar-Sri Lanka-Thailand EconomicCooperation) which added a newdimension to the South-Asian paradigmof cooperation. It is the first groupingwhich brings three South Asian membersof SAARC (India, Bangladesh and SriLanka) in a cooperative arrangement withtwo members of ASEAN (Thailand andMyanmar). It is seen by all members asproviding an opportunity for optimizingcomplementarities through economic,trade and investment linkages.14

The first meeting of Economic/Trade Ministers of BIMST-EC whichwas held in Bangkok in August, 1998imparted a new dimension to economiccooperation between the member states.It was agreed that BIMST-EC shouldaim and strive to develop into a FreeTrade Arrangement, and should focuson activities that facilitate trade,increased investment and promotetechnical cooperation among membercountries. It was further reiterated thatBIMST-EC activities should be designedto form a bridge linking ASEAN andSAARC.

At the Second Meeting of theBIMST-EC Trade and EconomicMinisters, held on 27th April, 2000 inNew Delhi, the Ministers stressed theimportance of a clear work programmeto implement the shared vision for aFree Trade Arrangement in BIMST-ECregion. The Ministers decided toconstitute an Inter-Governmental Group(IGG) to prepare a concept paper onpossible approaches towards apreferential trading arrangement leadingto a Free Trade Area on the basis ofinputs from all Member Countries.

The IGG noted that the basicobjective of establishing a Free TradeArea in the BIMST-EC region was topromote the harmonious developmentof economic relations among membercountries through the expansion of tradeby providing fair conditions ofcompetition for trade among them.

However, it was also felt that the ultimateobjective of the free trade area shouldbe to “create” trade in the region andshould not lead to the “diversion” oftrade. The IGG noted the variousapproaches, viz. “Positive ListApproach” as applicable in case ofSAPTA and the “Negative ListApproach” as followed in ASEAN FreeTrade Area (AFTA). The relevant WTOprovisions for notifying RTAs were alsoexamined.

The Report of the IGG wasconsidered in the 3rd BIMST-EC Tradeand Economic Ministers meeting heldat Yangon, Myanmar on 15th February,2001. The Ministers stressed theimportance of a time-bound workprogramme for establishing Free TradeArea and acknowledged the efforts ofthe Inter-Government Group (IGG) forpreparing the Concept Paper and agreedto set up a Group of Experts (GOE) ledby the government officials whichshould include members of theacademia and the private sector to studyin greater detail the pros and cons ofthe two approaches recommended byIGG. Since then the meetings, the GOEhas made steady progress forestablishing a BIMSTEC FTA (Box6.3). Furthermore, in the recent meetingin November 2003, BIMSTEC iscontemplating on finding ways andmeans for augmenting investment flowsamong the BIMSTEC members as wellas studying in-depth the possibilities ofsectoral cooperation. It is also worthmentioning that two of the majoreconomic partners of the BIMSTEC,viz. India and Thailand have alreadysigned a Draft Framework Agreementfor India-Thailand FTA and launched an‘early-harvest’ scheme on the basis ofa Feasibility Study on the subject.15 Thisis expected to further provide animpetus to the proposed BIMSTECFTA.

It is worth mentioning that theBIMSTEC process is also on its way towiden its membership. During itsforthcoming Heads of State Summit tobe held in Thailand in February 2004,



Nepal and Bhutan would be present withan observer status, and are expected tobe admitted as members in future.16

6.4. Bilateral EconomicCooperation in South AsiaThe South Asian region has beencharacterized by more intensivebilateral trade and investment linkagesin recent years which may be partly aresponse of the member states to arather slow progress of tradeliberalization in the framework ofSAARC. A brief analysis of theexperiences with India-Bhutan, India-Nepal and India-Sri Lanka bilateral

FTAs is presented in this section. Itis further corroborated by the fact thatIndia and Bangladesh as well asPakistan and Sri Lanka are alsomoving towards signing bilateralFTAs. Similarly, Bangladesh-Pakistanand Maldives-Sri Lanka FTA are alsobeing contemplated.

India-Bhutan EconomicCooperationWhile the basic framework of traderelations is covered by Article V of the1949 Treaty, which provides for “freetrade and commerce” between the twocountries, periodical bilateral

agreements have strengthened traderelations between Bhutan and India.Almost 90 per cent of Bhutan’s importand export trade is with India. Thus,India is Bhutan’s biggest and mostimportant trading partner. EvenBhutan’s third country exports andimports must pass through India.Therefore, highest importance isattached on the bilateral trade andcommerce arrangements with India. Itmay be mentioned that various trade andtransit arrangements with India areworking to mutual satisfaction. Thereare minimum problems relating tocustoms.17

Bhutan mainly exports electricity,mineral and mineral based productssuch as gypsum, coal, dolomite,cement, calcium carbide, ferro alloys,etc. Agricultural and wood-basedproducts are also exported to India.India contributes in a big way to its totalimports. These include fuel, consumergoods and machinery.

However, the economic relationsbetween India and Bhutan have not beenconfined only to the realm of trade. Theeconomic cooperation between the twois both intensive and extensive. Whileassistance from the Government ofIndia (GOI) in the social sectorscontinues to be substantive, cooperationis increasingly moving towardsmutually beneficial projects, such as inhydro-power development and industrialprojects. Economic relations have beenevolving over the last four decades froma donor-recipient relationship into onethat is increasingly symbiotic. It waswith the support of India that Bhutanlaunched its First Five-Year EconomicDevelopment Plan in 1961. Since then,India continues to be Bhutan’s mostimportant development as well aseconomic partner.

India assisted Bhutan in harnessingher enormous hydropower potential withlarge projects, viz. ChhukhaHydroelectric Porject and Tala project.Electricity generated by these projectsis exported to India. The availability ofcheap and reliable Chhukha power, has


Box 6.3: Framework of BIMSTEC FTA: Recommendations of theBIMSTEC Group of Experts (GOE):

Two meetings of the Group of Experts have been held to discuss and finalize the approachto be adopted for establishing a Free Trade Arrangement in the BIMST-EC region, the firstmeting of the GOE was held on 17-18th January, 2002, in New Delhi. Group of Experts wasset up to consider the outline of a report presenting possible guidelines for establishing aBIMST-EC free trade area; to study, analyze and prepare the report in accordance with theestablished outline including the identification of the pros and cons adopting a positive list ornegative list approach, and make recommendations on the possible guidelines for establishinga BIMST-EC free trade area; to present a report of the study, including recommendations tothe Senior Trade/Economic Officials within the specified time frame; The GOE of each countrymust submit information that would benefit the study and analysis, as well as in preparing thereport.

The GOE recommended that BIMST-EC should opt for “Negative List Approach” forthe FTA. The positive list approach is a more lengthy process than the negative list approachsince bilateral negotiations need to be held for each sector/product. For the negative listapproach, products not identified in the negative list can be immediately subjected to tariffreduction. Yet, whether or not the negative list approach is preferred to the positive listapproach depends largely on the number of sensitive products withheld by each country. Forthis approach to be effective for trade expansion, the number of items in the sensitive/negativelist should be reasonable.

The negative list approach is a more transparent approach towards trade liberalization, asthe domestic stakeholders are clearly aware of the liberalization programme which gives themtime to make necessary adjustments.

Considering the economic condition of member countries along with the advantages anddisadvantages of the two approaches discussed, the negative list approach would be moreappropriate for establishing the BIMST-EC free trade area since this approach would enhancethe intra-regional trade amongst the member countries far more effectively. To optimize thebenefits of trade amongst the Member Countries, the Trade and Economic Ministers mayconsider inclusion of Services and Investments in the FTA.

The Group of Experts was of the view that through market enlargement and liberalizationas well as measures for trade facilitation, the FTA in the BIMST-EC region will create anenvironment conducive to the improvement of efficiency and competitiveness of firms andindustries in member countries. It will also help in establishing a conducive framework forintra-regional investment flows and attracting investments from outside the region. The adoptionof simple and transparent rules, and recognition of the need for flexibility in the context ofexisting diversities in the development stages of its members will ensure that the benefits ofthe proposed FTA are shared equitably by all its member countries thereby contributing to theeconomic well-being of the people of the region.

Source: RIS based on GOE, 2002.


facilitated the industrial development ofBhutan and has led to setting up ofseveral plants such as: Bhutan Carbide& Chemicals Limited, Pasakha; BhutanFerro Alloys Limited, Pasakha; BhutanBoard Products Limited, Tata; PendenCement Authority Limited, Gomtu; andmany other factories, workshops andindustries.

Conceived as a project for themutual benefit the project has truly livedup to fulfill this important dream. Sincecommissioning, it has greatlycontributed in alleviating the powershortages in the Eastern Grid of India.The states of West Bengal, Assam, Bihar,Orissa, Sikkim, etc. are the mainbeneficiary states of India that get cheapand reliable hydroelectric power fromChhukha.

The Indo-Bhutan cooperation hasalso covered cooperation betweenBhutan Telecom Corportion and TCILin India in the area of mobile telephonyand international networking.

Summing up, it may be stated thatIndo-Bhutan economic partnership hasnot only benefited in terms ofstrengthened trade relations at thebilateral level but it has also given wayto investment cooperation as per therelative comparative advantages of thetwo countries.

India-Nepal EconomicCooperationThe Indo-Nepal economic relations aregoverned by the bilateral Treaties ofTrade and Transit and Agreement forCooperation to Control UnauthorizedTrade. During 1996, amendments weremade to Treaty of Transit and Tradewith Nepal according to which Indiawould import goods from Nepal free ofcustoms duty and quantitative restrictionsif the goods are manufactured in Nepal.However, the rules of origin requirementswere removed and the eligibility of goodsfor trade was decided by a technicalcommittee. This implies that except for anegative list, India and Nepal moved to afreer trade regime with respect toimports from Nepal into India. The

impact of such initiatives has been verypositive especially for Nepal as it hasbeen able to appropriate significant tradeand investment gains. It has also helpedIndian companies to reach the NorthIndian market by setting up plants inNepal.18

However, some of the effects ofrelaxed rules of origin have been a matterof concern for the Indian policy makers.The phenomenon of trade deflectionwas observed whereby third countrygoods were finding entry into the regionthrough preferential basis.

Hence, at the time of renewal ofthe Indo-Nepal trade treaty for a periodof five years with effect from March6, 2002, revisions were made to takecare of mutual concerns of the twopartners. The basic framework of theTreaty has been preserved andcontinued access is provided forNepalese manufactured goods into theIndian market on a non-reciprocal andduty-free basis. However, the importantmodifications that have been made incertain clauses of the protocol to theTreaty include modifications in rules oforigin, entry of certain sensitive itemsinto India free of customs duties on thebasis of a fixed quota and import ofthese items beyond the specified levelto be allowed only on MFN basis

The Indo-Nepal bilateral economiccooperation treaties have importantpolicy implications for economiccooperation in the South Asian regionat large. It has helped enhanced tradepropensities between the countries as aresult of the freer trade regime. Inparticular the freer trade regime andinvestment relations between India andNepal appear to have contributed toexport diversification in Nepal vis-à-visIndia, especially through efficiency-seeking joint ventures set up in Nepal.A large number of joint ventures havebeen set up in the readymade garmentssector and have contributed to Nepal’sexport dynamism. The share of Indianjoint venture in total authorized capitalin joint ventures in the textiles andgarments sector in Nepal was 54.32 percent as of year 2000.19

Furthermore, the Treaty hasprompted some Indian enterprises tolocate production based to serve NorthIndian markets as is revealed by jointventures set up by Dabur, HindustanLever, colgate, Kodak, among others(see Box 6.4)

An important highlight of recenttrade trends is the fact that the tradedeficit of Nepal vis-à-vis India hasdeclined sharply and has turned intosurplus in 2002.


Box 6.4: Indo-Nepal Treaty Boosts Trade

Nepal’s exports to India grew by a third last year which is the third consecutive rise afterthe amendments to the Indo-Nepal Trade Treaty that were made in 1996. Nepal’s central bankreported a 32 per cent increase in total exports, totaling roughly $534 million between 1998-99 and 1997-98. Exports to India reached about $192 million during 1998-99 from $91.6million in 1996/97. Nepal’s exports to India account for almost 36 per cent of Nepal’s totalexports. The Trade Treaty between the two countries presently allows Nepal-made products,except alcohol, tobacco, cosmetics, etc. duty-free access to India.

The eligibility for duty-free access is a Certificate of Origin guaranteeing that at least twomanufacturing processes were done in Nepal. The provision has increased Indian investment,which according to banking estimates rose from $44m in 1996 to reach about $59m in 1998.One prime reason given for this trend is that the Treaty has made access to India’s northernmarkets from factories in Nepal both cheaper and easier for Indian companies, especially forcompanies whose only Indian factories are in the south of India. For instance, the northern-most factory of India’s Colgate-Palmolive is located in Bombay. It also has a plant in Nepal.The Bank’s export figures show that toothpaste exports from Nepal have increased from $11m (1997-98) to about $61m (1998-99). Among newcomers now eyeing the north Indianmarket is Kodak Nepal, an undertaking of Eastman Kodak Company of the US and KodakIndia, that is ready to begin commercial production.

Source: RIS based on Financial Times, August 26, 1999.


The above trends suggest that theIndia-Nepal trade treaty and the jointventures have helped in building theexport supply capabilities andstrengthening the trade-investmentrelationships between the countries.

India-Sri Lanka EconomicCooperationThe signing of the India-Sri Lanka FreeTrade Agreement (ISFTA) in 1998 andits operationalisation in 2000 isconsidered an important policy step totap the economic complementaritiesbetween the two countries. The RISstudy20 on the basis of in-depth analysisof different dimensions of Indo-SriLanka Economic Cooperation hadrecommended such an initiative.21

More recently, during thenegotiations between India and SriLanka the following dimensions of theFTA have been discussed and actedupon:

In terms of Sri Lanka’s inability tofulfill its tariff rate quota in the Teaand Garment Sectors, the proposalof Sri Lanka to provide additionalIndian ports has been accepted.The Indian side wanted tariffconcession for its cement exportsto Sri Lanka which has been agreedto by Sri Lanka.Given their import dependence invarious sectors the Sri Lankanproposal was to make downwardrevision of the Rules of Originwithin the framework of bilateralFTA with India. Since theAgreement provides for adopting asectoral approach in this matter ithas been decided that both thecountries would exchange a list ofsectors wherein downwardrevision of the existing ISFTA isdeemed necessary.Since the implementation of ISFTA

there has been a phenomenal increasein India-Sri Lanka trade. Exports of SriLanka more than doubled from US$ 71million in 2001 to 168 million in 2002.India’s export to Sri Lanka increasedfrom $604 million in 2001 to $831

million in 2002 thus crossing the onebillion dollar mark for the bilateral tradeturnover. More importantly, the ISFTAhas helped in narrowing the trade-deficitfor Sri Lanka from 8.6:1 to 4.9:1.22

Furthermore, although the agreementdoes not address investment, it hasstimulated new FDI for rubber-basedproducts, ceramics, electrical andelectronic items, wood-basedproducts, agricultural commoditiesand consumer durables. Because ofthe Agreement, 37 projects are nowin operation, with a total investmentof $ 145 million.23 India emerged asthe third largest foreign investor in SriLanka with total investment over the

last decade approximating US$ 400million.

From the Indian investors’ point ofview the liberal environment forinvestments in Sri Lanka has made it anattractive location both formanufacturing as well as exports. Thisperception has got instilled in thebusiness communities of both thecountries and consequently, there hasbeen a spurt of investment initiativesfrom the Indian side in Sri Lanka suchas those presented in Box 6.5 in thefields of information technology, tyres,rubber products, etc.

Within one year after theimplementation of FTA (31.3.2000 to


Box 6.5: Indian Investments in Sri Lanka: Some Illustrations

John Keells Institute of Information Technology (Pvt) LtdThe John Keells Institute of Information Technology (JKIIT) is a member of John KeellsHoldings, the largest blue chip conglomerate in Sri Lanka. JKIIT’s technical collaborationpartner is Tata Infotech, a subsidiary of the Tata Group, India. JKIIT commenced operationsin 1999 with an initial investment of Rs 25 million. Today, the company is equipped to train1,000 students annually in both career and professional courses. JKIIT has also introducedspecial courses to re-train non-IT graduates as software professionals. The present curriculum,which is recognized by British universities, will be expanded to include university degrees inaffiliation with prestigious international universities.

CEAT-Kelani Associated Holdings LtdCEAT-Kelani Associated Holdings Ltd is a joint venture between CEAT India, which is amember of the RPG Goenka Group, India, and the Associated Motorways Group, Sri Lanka.

Associated CEAT Pvt Ltd (ACPL) manufactures cross ply rubber tyres for trucks, busesand three-wheelers at their factory at Nagoda, Kalutara District. CEAT India holds 60 per centequity of ACPL and dominates the local truck tyre market with a 45 per cent market share.ACPL commenced operations in 1992 with an initial investment of Rs 111 million. By the endof June 2000, the company had implemented three expansion programmes; aggressively movedinto export markets in Pakistan, Bangladesh, Africa and the Middle East; and forged a jointventure with the former state owned corporation, Kelani Tyres Ltd. Through this new venture,CEAT-Kelani Associated Holdings Ltd, ACPL intends manufacturing steel radial tyres forboth local and international markets with an output capacity of 100 metric tonnes of tyres ofvarious types daily. At present, ACPL employs 230 and enjoys an average annual turnover ofRs 900 million. In 1997 the company was also awarded ISO 9002 quality assurance certificate-the first tyre manufacturer in Sri Lanka to obtain this distinction-and by the end of June 2000the total investment stood at Rs 259 million.

Bensiri Rubber Products (Pvt) LtdBensiri Rubber Products is a wholly owned subsidiary of Bengal Waterproof Ltd, Calcutta,India. The company’s ‘Duck Back’ brand portfolio also include rainwear, school bags andhospital clothing. It is located at the Katunayake Export Processing Zone (EPZ). Utilizinglocal rubber, the company manufacturers hot water bottles and household gloves exclusivelyfor export markets in Western Europe, the UK and South America.

Bensiri Rubber Products was one of the first Indian companies to invest in Sri Lanka dueto the country’s streamlined import/export processes, attractive fiscal incentives and developedinfrastructure facilities. At present, Bensiri Rubber Products employs 130, and by the end ofJune 2000, total investment stood at Rs. 46 million.

Source: http://www.boisrilanka.org/web/india.phtml


framework of a ComprehensiveEconomic Partnership Agreement. JointStudy Group (JSG) set up by the twoGovernment has submitted its Reportto them in October 2003. JSG has madeseveral proposals to further cooperationin such areas as infrastructuredevelopment, banking cooperation,trade facilitation through strengthenedtransport linkages. An immediate stephas been taken to allow domestic privateairlines to fly to Sri Lanka as a part ofan open sky policy in October 2003.

Pakistan-Nepal and Sri Lanka-Nepal Economic CooperationMore recently, there has been anintensification of efforts to forgeeconomic linkages with Nepal by otherSAARC members like Pakistan and SriLanka (Box 6.6). The proposal toestablish Pakistan-Nepal FTA as well asSri Lanka-Nepal FTA has been basedon the fact that while Sri Lanka couldbe a good market for small but high-valued goods including agriculturalproducts from Nepal, in terms of Nepalitea, Pakistan appears to be a largemarket.

1.5.2001), Sri Lanka had receivedinvestment in as many as 41 projects.24

The total value of these projects isaggregated to be Sri Lankan Rs. 8, 878million with employment potential of2260 in number. The BOI initiatedprojects under FTA falls in a widevariety of industries from lightengineering to paper products.

Furthermore, Indian manu-facturers, Tata, Hero and Godrej wereexpected to establish plants in Sri Lankaduring 2003 for catering to Sri Lankanmarket and for re-export to India andworldwide market. Infosys, one of thebiggest IT companies, is also expectedto recruit Sri Lankan IT specialists forits operations in Mauritius. Tata wouldmanufacture light engineering productsand motor accessories. Hero willestablish facility to manufacture cyclesand motor cycles. Godrej plans tomanufacture products ranging fromrefrigerators to door locks.25

The upshot of the above is that inthe context of India-Sri Lanka bilateraleconomic linkages, efficiency seekingindustrial restructuring process isunderway and investment flows fromIndia to Sri Lanka on the capital accountappear to be counter-balancing the tradedeficit which Sri Lanka has had vis-à-


Box 6.6: Pak, Lanka Offer FTA Proposal to Nepal

Recently, Pakistan and Sri Lanka have separately proposed to establish a bilateral preferentialtrading regime with Nepal. “Both the South Asian neighbours recently lodged formal letter ofinterest in establishing the bilateral FTA with Nepal,” Purushottam Ojha, Joint Secretary atthe Ministry of Commerce, Industry and Supplies told The Kathmandu Post. The proposalsof Pakistan and Sri Lanka suggest of establishing the bilateral preferential trading regime onproduct-by-product basis. Ojha said that these are currently studied at the ministerial leveland would be forwarded to higher authorities after some time.

If Nepal accepts the proposals, it will require signing a framework agreement eachwith proposing countries and exchange products lists to negotiate for duty free trade.“At present, the ministry is evaluating the impact of establishing FTAs and identifyinggoods of competitive advantage that the country could export in these countries,” saidofficials. Studies have shown that Sri Lanka could be a good market for small but high-valued goods including agriculture products, while Pakistan is a huge market for Nepalitea among others. Chandi Raj Dhakal, officiating President of the Federation of NepaleseChambers of Commerce and Industry (FNCCI), meanwhile, viewed that the countryshould not hesitate to enter into bilateral free trade agreement if it offers businesspotentials. “As Nepal’s trade with Pakistan and Sri Lanka is minimal, this could be agood opportunity in expanding the market,” he said. This would, open new marketavenues to at least some of the Nepali products, he added.

Source: The Kathmandu Post, December 9, 2003.

vis India. This is yet another exampleof strengthening of trade-investmentlinkages in the South Asian region.

Encouraged by the successfulfunctioning of the ISFTA, the twogovernments have now decided toextend the scope of cooperation toinvestment and services as well in the

Box 6.7: Pak-Lanka FTA before Year End

The much awaited Free Trade Agreement (FTA) between Sri Lanka and Pakistan is likelyto be finalized before year end, Commerce and Consumer Affairs Minister Ravi Karunanayakehas said. The Minister made this disclosure when a 10-member trade delegation from Pakistancurrently in Colombo, called on him this week. He said that forwarding two years of Marketintelligence to the customs authorities in Karachi has failed in lowering certain custom dutiesimposed on number of Sri Lankan imports to Pakistan, according to Sri Lankan Consul GeneralP.D. Fernando who is in Colombo with a Pakistan delegation. “All these things will be sortedout when the FTA would come in to force in coming December,” Minister Karunanayake said.

The Pakistani visitors are due to meet the members of Ceylon Chamber of Commerce andsenior officials of the Coconut Development Authority during their stay. The majority of thedelegation are coconut friendly and are looking for coconut by-products such as deccicatedcoconut, coconut oil, and copra.

The delegation will highlight joint studies to find ways to improve the trade balance freeinvestment flow between the two countries, possibilities of networking new industries to faceglobal competition, with particular reference to agriculture, food, textiles, rubber and plastics

The Pakistani delegation is expected to uplift the image of Pakistan as a positive andprogressive business partner to Sri Lanka. “The recent economic achievements of our countryshould be considered as signs of better future for both countries,” stated delegate.

The delegation also invited Sri Lankan counterparts to reciprocate by sending a similardelegation to from Sri Lanka, to built stronger economic ties with their regional partner to formalliance to maximize gains from the globalization of the world trade. The leader of the delegationMr. Jaffar Kudia the Chairman of the Karachi Chamber of Commerce stressed the fact that thereopening of direct air links between the two countries should be exploited by businesscommunities of Pakistan and Sri Lanka.Source: The Financial Times, October 8, 2003; Dawn the Internet Edition, May 7, 2003, Pakistan.


Pakistan-Sri Lanka FTAPakistan-Sri Lanka FTA is beingenvisaged on a fast track basis amongothers that are in the pipelines. As evidentfrom Box 6.7 this FTA is being viewedas a forum for sorting out various bilateraleconomic issues between the countries.The proposed FTA is expected to becomprehensive in nature by includingvarious dimensions of economicinteractions such as improving the tradebalance, promoting freer investment flowbetween the two countries, possibilitiesof networking for new industries to faceglobal competition, with particularreference to agriculture, food, textiles,rubber and plastics.

India-Bangladesh FTAIn recent times, efforts have been on tointensify economic interactions between

India and Bangladesh. Preparations arebeing made to negotiate an FTA betweenIndia and Bangladesh. The FTA isconsidering provisions for duty freeentry for all goods except those includedin a short negotiated negative list. It willalso provide for the elimination of allnon-tariff barriers in a time-boundframework.26

Concerns have been raised over theissue of trade imbalance betweenBangladesh and India. However, it maybe pointed out that while negotiating theBangladesh-India FTA the perspectiveof efficiency seeking industrialrestructuring needs to be kept in mindwhereby Indian investments inBangladesh could build supply andexport capability to address the tradeimbalance as the experiences of FTAsbetween India and other South Asiancountries suggest.

Bangladesh-Pakistan FTA andBangladesh-Sri Lanka FTABangladesh is evolving FTAs withPakistan and Sri Lanka (Box 6.8). Asfor the Bangladesh-Pakistan FTA, thetwo sides are expected to establish aframework for the FTA during the


Box 6.8: Bangladesh Plans to Hold FTA Talks with Pakistan, Sri Lanka

Bangladesh, which is scheduled to hold negotiations with India on the free trade agreement(FTA) next month, wants to also hold talks with Pakistan and Sri Lanka on the subject.

The foreign secretary Mr Shamsher Mobin Chowdhury said that Bangladesh wants to havediscussions with Pakistan and Sri Lanka on FTA and hope to “come to a conclusion within thenext few months”. Negotiations between Dhaka and Delhi on FTA are scheduled to be held nextmonth.

Source: http://www.expresstextile.com/20031002/foreigntrade02.shtml

Bangladesh-Pakistan Free Trade Agreement SoonBangladesh and Pakistan are set to conclude Free Trade Agreement (FTA) as

Foreign Secretary Shamsher Mobin Chowdhury held bilateral consultation with hisPakistani counterpart Riaz H Khokar in Islamabad yesterday. A group of experts fromIslamabad would visit Dhaka soon to exchange views on the conclusion of FTA between thetwo countries, said a joint press statement issued after the Foreign Secretary level meeting.The Dhaka consultation might be a final round before the signing of the FTA, an official of thePakistan High Commission in Dhaka said. The two sides also agreed to hold the 8th meetingof the Joint Economic Commission (JEC) in Dhaka shortly. Islamabad also agreed to admitmore students from Bangladesh in public and private universities in Pakistan. The pressstatement said the Foreign Secretaries of Bangladesh and Pakistan at the first round of bilateralconsultations discussed all issues of bilateral interests. They agreed to expand the existingtrade and economic relations for the mutual benefit of the two countries. Regional andinternational issues, including steps to realize full potentials of SAARC, were also discussed.The two sides also reviewed the follow up action on the three agreements signed duringPakistan President General Pervez Musharraf’s visit to Bangladesh in June last year. Theagreements are on regular political consultations, cultural exchanges and Joint Business Councils.The press statement said the next round of bilateral consultations would be held in Dhaka onmutually agreed dates next year. Bangladesh and Pakistan yesterday exchanged plots forconstruction of Embassy complexes in Dhaka and Islamabad. Pakistan’s Foreign Secretaryformally handed over the documents of a plot in Islamabad Diplomatic Enclave for the BangladeshHigh Commission to Foreign Secretary Shamsher Mobin Chowdhury. Chowdhury is expectedto pay courtesy calls on the Pakistan President and the Prime Minister tomorrow (Saturday).Source: http://www.ittefaq.com/

Box 6.9: Sri Lanka’s FTA with Maldives

Sri Lanka will sign a Free Trade Agreement with Maldives to further strengthen theeconomic and trade ties between the two countries.

“The agreement will be concluded before the end of the year and will help further promoteand strengthen regional trade,” said Minister of Commerce and Consumer Affairs RaviKarunanayake in an exclusive interview with the Sunday Observer. The Minister will lead adelegation to Maldives next week where he is expected to meet Maldives’ President MaohammedAbdul Gayoom, Trade, and Industry Minister Abdulla Yameen, Planning and NationalDevelopment Minister Ibrahim Hussain Zaki and other government officials to discuss mattersrelating to the FTA.

Maldives has order and peace and the two countries have enjoyed friendly ties for years.Sri Lankans invest in Maldives while Maldivians invest in Sri Lanka. “Brisk trading is going onas usual and there is no disturbance at all. We have gone through bad experiences for 23 years,but we do not want our neighbour to go through that experience.

Therefore, we will extend our fullest cooperation and support to them,” he said. Sri Lankais the second most important export market for Maldives and Maldives is Sri Lanka’s 19thlargest trading partner. The trade balance between the two countries has always been favourabletowards Sri Lanka. Sri Lankan companies do business in Maldives in the areas of tourism,banking, insurance, credit cards, management consulting and manufacturing.

A large number of Sri Lankans have gained employment in many of these ventures andelsewhere. Close to 9000 Sri Lankans work in Maldives and they together with Lankan businessesin Maldives contribute to the Lankan economy. The biggest investors too have investedsubstantially in Sri Lanka in areas such as the hotel industry, education and manufacturing.Source: Sunday Observer Online Edition, October 12, 2003, Sri Lanka.


meeting, and another round of talks willbe held in Islamabad probably in 2004to list the items to be mutually offeredfor concessional trade.27

Recently, in November 2003negotiations were held for Bangladesh-Sri Lanka FTA whereby the Bangladeshside proposed special and differentialtreatment from Sri Lanka, after the freetrade agreement is signed andimplemented. Sri Lanka has alreadyshown interest in playing a positive rolein removing trade gap between Dhakaand Colombo.

During the first half of the 2002-2003 financial year, Bangladeshexported goods worth Tk 1.61 millionto Sri Lanka, while it imported from SriLankan goods valued at Tk 4.23 million.The trade gap with Sri Lanka stood atTk 2.62 million. It may be mentioned

to each other under the fourth round oftrade negotiations of SAPTA at ameeting held at the SAARC Secretariatin Kathmandu on December 2, 2003.India and Pakistan agreed on inclusionof additional 500 tariff lines underSAPTA basket of tariff concessions,which, though bilaterally negotiated, willalso be available to all other memberstates. The depth of preferential tariffconcessions extended by both sidesranges from 10 to 25 per cent.29

There is also immense scope forinvestment cooperation in terms of jointventures (JVs) between India andPakistan as enlisted in Box 6.10.

Road Map for SAARCThe Group of Eminent Persons (GEP)of SAARC had set before theAssociation a bold vision and road mapto go beyond SAFTA by 2010 for allthe SAARC countries to South AsianCustoms Union by 2015, and SouthAsian Economic Union by 2020. Thisindeed is a road map of progressivelydeepening economic integration in viewof the changed context global amongthe SAARC countries. In view of thechanged accomplish this vision in anexpedited manner.

6.5. Monetary Union in SouthAsia: Prospects and the WayForwardMonetary cooperation can act as acatalyst in promoting cooperation amongcountries in a wide range of areas andgrowth of all the economies in theregion. The first and immediate step thatcan be taken is to introduce a parallelcurrency and utilize that instrumenteffectively to promote regionalcooperation in trade and investment,which can eventually prepare the groundfor a common currency.

Benefits of a Common CurrencyRegime in the RegionThe common currency regime, whenachieved, can confer substantial benefitsto the region. With uncertainty aboutexchange rates removed, and


that two sides are considering the draftof the FTA between Sri Lanka and Indiaas a model, in the process ofdiscussion.28

Sri Lanka-Maldives FTAIn order to provide impetus to theexisting bilateral economic linkagesbetween Maldives and Sri Lanka, thetwo countries are contemplating on abilateral FTA (Box 6.9). Variousmanufacturing and services sectors arebeing considered for preferential tradingarrangement between the two countries.

India-Pakistan Trade andInvestment CooperationRecently, India and Pakistan havesuccessfully concluded bilateralnegotiations on additional lists ofproducts for preferential market access

Box 6.10: Potential JVs between India and Pakistan

A study commissioned by FICCI has come up with a number of areas of potential jointventures between Pakistan and India a select is given below:

Industry Group Project FocusInformation Software Exports Training Centre/Centre for Software TrainingTechnology (IT) & Management (CSTM) Software Development Center (SDC).

Pakistan has the potential to become an important softwareexporting and training center. India can become a role model andboth the countries should cooperate and collaborate to tap thelarge global market for software.

Fish Processing Processed Frozen/Canned Fish Products Future thrust should beon valve added canned products exports to the developedcountries.

Drugs & Bulk drugs: expansion of formulation sector (tablets, capsules,Pharmaceuticals (DAP) ointment, injections, etc.) and expansion of health care products

(IV fluids, disposable syringes, diagnostic kits etc.). Indian pharmaindustry can provide the necessary support and assistance toPakistan for the expansion of its Industry.

Agro-Chemicals A pesticides manufacturing unit in Pakistan. With the expansionof agri business, demand for agro chemicals will grow in future.Indian major players can play an important role through transferof technology.

Chemicals Dyes and pigments manufacturing unit in Pakistan has a strongmanufacturing base for textiles and leather. Indian players andmultinationals can assist Pakistan in developing the sector.

Auto mobile Ancillary Integrated auto component complex. Next to India, Pakistan isthe only country in the SAARC Region to Manufacture &Assemble Passenger Cars: Pakistan may also consider assemblyof HCV & LCV in collaboration with TELCO/Ashok Leylandfrom India.

Source: FICCI, Status Paper India Pakistan Economic Relations, 2003.


transaction costs reduced, trade andinvestment in the region is likely to geta big boost. Also with money creationunder regional guidelines, there wouldbe better prospects of synchronizationof inflation, interest rates and GDPgrowth, all of which could contributeto accelerated growth and povertyreduction. In fact, a common currencyregime can eventually play an importantrole in convergence towards a target of7-8 per cent annual GDP growth for allcountries of the region, which isessential for virtual elimination ofabsolute poverty in the region within ageneration or so.

The spirit of enhanced monetarycooperation is very much in the air inAsia today. In 1997, in the wake offinancial crisis in 1997, the Japaneseauthorities made a proposal for an AsianMonetary Fund (AMF). It was basicallya sound proposal but was discardedimmediately, partly because of theinadequate technical preparation andpartly because of the conflict of interestwith the major power in the globalfinancial infrastructure. Since then,some of the basic ideas of AMF haveresurfaced in other garbs. Chiang MaiInitiative has been able to put together acontingency fund of over $ 30 billion,which can be activated, though undersomewhat difficult rules and regulations,to help in balance of paymentsdifficulties of member countries in EastAsia. The Asian Bond Fund createdunder the leadership of Thailand also hasa major potential for financing regionalinvestments through public as well asprivate sector. South Asia should notlag behind in the area of monetarycooperation.

Importance of Parallel Currencyas the Initial StepFor effective progress in regionalcurrency reforms, it is important tomake a distinction between parallelcurrency and common currency.Common currency means thatindividual countries do not have theirown currency and whole task of

currency creation and monetary policyis agreed at a regional level withagreements on national component ofcurrency and money creation. Interestrate and exchange rate policies are alsocentralized. That system thus requiressurrender of monetary sovereignty andof seigniorage associated with currencycreation and monetary expansion.

Parallel currency on the other handrequires no such surrender ofsovereignty. It requires little more thanwhat has been achieved at the globallevel though creation of SpecialDrawing Rights (SDRs) under theInternational Monetary Fund. Individualcountries will retain control of theircurrencies and monetary policies. Butin addition there will be a currencycreated jointly according to certain rulesand allocated among the membercountries. There are importantquestions about the weightage ofdifferent currencies in the basket, aboutpredictability of the value of thecomposite currency and about theextent of its usage by the general public.However, these are technical problems,which can be solved, even in the currentcontext of South Asian cooperationefforts. In the context of Europeanintegration movement, the first stagewas introduction of European CurrencyUnit (ECU), a composite monetary unitconsisting of a basket of EuropeanCommunity currencies and the processof consolidation under EuropeanMonetary Union (EMU) before gradualevolution to the single currency, EURO.It is interesting to note that RobertMundell, the Nobel Laureate and anauthority on global monetary matters(sometimes called “Father of Euro”) inhis recent lecture at Asian DevelopmentBank argued that while Asia may not beready for common currency it mightbe for a parallel currency. The samegoes for South Asia. We can startimmediately with a parallel currencywhich will be a currency composite ofSouth Asian currencies and mayperhaps be called SAR (South AsianRupia).

Characteristics of a South AsianParallel CurrencyThe parallel currency SAR will be fullyconvertible into any internationalcurrency and will be fully backed byreserve fund. It will be legal tender forcross country transactions within SouthAsia and will be increasingly used asunit of account for trade and investmenttransactions within the region. The issueof stability of SAR will of course beimportant. However, it should be notedthat relative values of currencies inSouth Asia in the last ten years havebeen more stable than those betweenthe three major world currencies, US$,Euro and Yen which dominate the SDR.And with increasing cooperation inmacro-economic policies includingexchange rate policies, South Asian cando even better. The policies followed inIndia and the relative stability of India’sreal effective exchange rate is perhapsa model to draw upon. At the initialstage, it is not necessary to enter intostrict criteria on macro-economicpolicies. However, a recent study hasshown that there is a convergence ofimportant macroeconomic indicatorslike inflation and exchange rates besidespatterns of external shocks faced bythem among different countries of SouthAsia which enhances the feasibility ofmonetary cooperation.30

Conditions for Regional Integrationand Eventual Common CurrencySouth Asian countries can create a poolof foreign exchange reserves of say 10per cent of their current reserves (whichwill amount to more than $11 billionequivalent) in an institution to be called,say, South Asian Reserve Fund (SARF).Backed with these reserves, SARsequivalent of a multiple of basic reservescan be created for giving loans or buyingbonds issued by South Asiangovernments or corporations asappropriate. The lending rates on theseloans will be higher (say 5 per cent peryear at present) than the interest paidon reserves (say 3 per cent per year atpresent) which will be higher than what



most reserves banks in the region aregetting today from their dollar reserves.

As the SAR gets accepted, theSARF can earn profits which will bedistributed among members as grantsfor development purposes. The principleof creation and utilization of SDRs fordevelopment purposes has beenadvocated by a long line of economists.Most recently, Amartya Sen, JosephStiglitz and George Soros made a jointcall for further issuance of SDRs forfacilitating world economic recoveryand development. At a regional level,these proposals can be implemented forthe benefits of the region and beyond,without waiting for approval by anynon-regional entity.

Parallel Currency can facilitateregional integration by funding thecreation of regional public goods in thearea of transport and communication,energy, information technology,biotechnology, food security, tourismand science and technology. Theimproved provision of regional publicgoods can be a powerful supplement toprogrammes of regional free trade areas,which are often frustrated by inadequateinfrastructure for regional trade andinvestment.

The profits of the SARF (theseigniorage from the parallel currency)can be used to accelerate the processof convergence in the region as ithappened in the European context. Withrespect to the allocation of profits ofSARF, the less developed parts of theregion can be given special andpreferential treatment, which will helpachieving a shared prosperity in theregion.

Provision of regional public goodsand concessional assistance for thelagging regions will help to buildconfidence in the region and facilitatebolder programmes such as open borders,labor mobility and common currency.The manner in which the bigger countriesin Europe won the confidence of thesmaller countries and helped toaccelerate their development could be amodel for South Asia to learn from.


The Next StepsThe steps involved in the proposedprocess are: (a) creation of a parallelcurrency and associated agreements forits stability, (b) setting up of a reservefund, (c) funding of regional publicgoods to promote trade and investment,(d) special and differential treatment oflagging parts of the region to help theconvergence process in the region, and(e) building of mutual trust andconfidence among the partners in theregion. These steps will createconditions, which are usually necessaryfor a common currency area.

SAARC Summit could take stepsto set up a Working Group comprisingof Central Bank Governors to evaluatethe feasibility of the proposal and takeit forward.

6.6. Lessons from SouthAsian Regional CooperationInitiativesThe major lessons that have emergedfrom the South Asian regional economicintegration process can be summarizedas below:

The South Asian region hasdisplayed economic growthdynamism in the recent past. Sucha trend is getting manifested inincreased trade and investmentflows on an intra-regional basisthrough an ongoing efficiency-seeking industrial restructuringprocess due to trade liberalizationand investment facilitationmeasures. This has come aboutboth under the SAPTA process aswell as the bilateral FTAs in theregion.The progress of SAPTA in termsof tariff liberalization has beenrather slow and marred withdiscriminatory practices ascompared to the progress madeunder bilateral FTA regimes likeIndia-Bhutan, India-Nepal andIndia-Sri Lanka. This is because thebilateral FTA negotiations andimplementation have been on afaster track, more far-reaching in

terms of trade coverage andinvestment-facilitation. It is evidentthat even the limited tradeliberalization under SAPTA hasproduced encouraging results interms of trade expansion. Studiessuggest that SAFTA could lead tosubstantial expansion of mutualtrade.Bilateral FTAs in the region have ledto equitable expansion of tradeflows with exports from smaller andlesser developed partners expandingfaster. The FTAs have also led toinvestment flows and trade-creatingjoint ventures which facilitate thesupply capabilities of lesserdeveloped partners.Still there exists immense potentialfor trade and investmentcooperation within the region,efficiency seeking industrialrestructuring, horizontalspecialization in one of the mostimportant sectors like the textilesand clothing (especially to meet theglobal challenges in the post-MFAscenario).In the light of the global trend ofadoption of regionalism as a strategyfor growth, there is a compellingcase for the region effecting itstransition into an economic andmonetary union by expeditiouslyimplementing SAFTA, forming aSAARC Customs Union andintroducing a South Asian parallelcurrency, as an intermediate step toa single currency. The region shouldalso adopt a SAARC Agreement onPromotion and Protection ofInvestments and move towardsharmonised investment policiesacross the region to facilitate intra-regional investments. It has beenargued that these steps will helpfacilitate efficiency-seekingrestructuring of industry in the region,thus, enabling them to exploiteconomies of scale and specialisation.Thus, Sri Lanka may emerge as theregion’s hub for rubber-basedindustries, Bangladesh for energy-



intensive industries and Bhutan,forest-based industries, and so on.The regional economic integrationwill also make member countries,especially the smaller ones, moreattractive destinations for thirdcountry investments by obviatingthe constraint of small domesticmarket.

Endnotes1 RIS, 2003.2 See RIS, 2002.3 Mukherji, 2003.4 Mohanty, 2003.5 See also Ramasamy, 1995; Mehta and

Mohanty, 2001; Fisher and Vousden, 2001;and Krueger, 1999.

6 See Mehta and Bhattacharya.7 See RIS 1999. SADCR. And RIS Discussion

Paper by Das, 2003 (forthcoming).8 RIS, 1999. SADCR.9 Kelegama, 1999.10 Kumar, 1986.11 Panchamukhi, 1995a; Panchamukhi and Das,

1997; RIS, 1999. SADCR.12 Thant et al., 1995.13 See RIS, 2002a.14 See GOE, 2002.15 Das, Ratanakomut and Mallikamas, 2003.16 http://meaindia.nic.in17 The Financial Express, 2003.18 RIS, 2002.19 RIS, 2002.20 Panchamukhi, Rao and Kumar, 1993.21 RIS, 2002.22 JSG Report on India-Sri Lanka

Comprehensive Economic Partnership.October 2003.

23 UNCTAD 2003.24 RIS, 2003b.25 High Commission of India, 2003.26 Business Line, 2003.27 Asia Pulse, 2003.28 The New Nation, 2003.29 The Kathmandu Post, 2003.30 See for details Mirza Allim Baig and Sweta C.

Saxena, 2003 (forthcoming).

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http://www.ittefaq.com/


7.1. Introduction

The level of infrastructuredevelopment is one of the important

determinants of economic performanceof a nation/region. Availability oftransport infrastructure is crucial forproviding an impetus to economicactivities, especially international trade.In the context of intra-regional trade,quite often the imperatives fordeveloping transport infrastructurenecessitate transcending geographicalboundaries. Therefore, adopting aregional approach for augmenting intra-regional trade and development activitiesbecomes a pre-requisite.

Analytically, there are two primeeffects of transport infrastructure,among others, on intra-regional trade.First, its development could be viewedas a trade facilitation mechanism in termsof movement of tradeables among themembers of a regional grouping.Secondly, the evolution of an efficient andlow-cost transport infrastructure couldcontribute towards improving exportcompetitiveness, resulting in trade-creation on a regional basis. Adequacyof infrastructure helps determine oneregion’s success and another’s failure– in diversifying production, expanding

trade, coping with population growth,reducing poverty, and improving qualityof life. Such effects need to be viewedin a broad perspective of a two-waycausality running between trade andeconomic growth on one hand, andincome and infrastructure on the other(Box 7.1).

It is with this analytical backdropthat this Chapter presents a profile oftransport infrastructure in the SouthAsian region, in the realms of road, rail,port, air and inland waterwaysnetworks. The Chapter further attemptsat identifying the contours of thepotentials for intra-South Asian


Transport Infrastructure:Present Status and Potentials for Cooperation7

Box 7.1. Income-Infrastructure Relationship in South Asia

Using 11 important infrastructure variables over four cross-section points, De and Ghosh(2003) have shown that South Asia has failed to foster a balanced regional development even aftera long period of planning and protected industrial regime. The available evidence of this studyshows inter-South Asia disparity in both basic infrastructure facilities and per capita income hasbeen rising over the years. The relative positions of the countries have remained unchanged duringlast quarter century in terms of any definition of development.

Note : IDI and PCI refer Infrastructure Development Index and Per Capita Income.Source: De and Ghosh (2003).


Table 7.1: Road Network in South Asia in 2002

Countries Road Length Paved Roads Road Density

(km) (% of total roads) (km per sq. km of area)

Bangladesh 201543 9.50 1.40Bhutan 2580 80.00 0.05India 3315231 53.20 1.01Nepal 7967 39.20 0.05Pakistan 190532 55.30 0.24Sri Lanka 104563 40.70 1.59South Asia 3822416 46.30 0.73Source: RIS based on World Development Indicators CD ROM 2003.

Table 7.2: Railway Network in South Asia in 2002

Countries Total Railway Share of Broad Gauge Lines Railway DensityLines to Total Railway Lines

(km) (%) (km per sq. km. of area)

Bangladesh 4980 25 0.03India 63140 72 0.02Pakistan 7791 89 0.01Sri Lanka 1449 90 0.02South Asia 77248 69 0.02

Source: RIS based on World Development Indicators CD ROM 2003.

cooperation in the aforesaid areas.Towards the end, some policyperspectives are presented in thiscontext.

7.2. Transport InfrastructureProfile of South AsiaThe adequacy of transportinfrastructure is one of the importantdeterminants of growth. For instance,the transport infrastructure hasimmensely helped the EU to grow fast.1

The present status of road, rail, air,water, and port networks in South Asiahas been summarised below.

Road Network in South AsiaWith 3.82 million km road network in2002 (Table 7.1), SAARC countriesaccount for 10 per cent of the worldroad network. Although there are doubtsover the quality of roads in South Asia,each sq. km of area is now served byone km of road in some of the countriesin South Asia like Bangladesh, India andSri Lanka. Good quality roads are alsonow been found in rural belts inaforesaid three countries. In last 10years, roads in South Asia have grownin prominence as a means of movinggoods and people. This has partlyreflected the greater innate flexibility ofroad transportation in South Asia.

In South Asia, India has anextensive 3.3 million km road networkmaking it one of the largest in the world.In India, National Highways, the primearterial routes, span about 58,112 kmthroughout the country (2 per cent oftotal road lengths) and cater to about

Transport Infrastructure

45 per cent of the total road transportdemand. In view of rising freight andpassenger transport, Government ofIndia has been implementing itsambitious National HighwayDevelopment Project (NHDP) quitesuccessfully (Box 7.2).

Rail Network in South AsiaRailway network in South Asia is oneof the largest railway systems in theworld. It has an extensive network whichis spread over 77,248 km, comprising 69per cent of broad gauge network (Table7.2). India, Pakistan and Sri Lanka havequite large network of broad gaugerailway system. However, only about 25per cent of railway network in Bangladeshis broad gauge which is far below theSouth Asia average.

Although, railway networkhistorically played an importantintegrating role in the social andeconomic development in South Asia,currently this facility is losing out to theroad sector. At present, approximately30 per cent of freight and 20 per centof passengers are being carried by therailway sector in South Asia whereas

the same for road sector are 70 per centand 80 per cent. Railway system inIndia is running in losses primarily dueto cross-subsidization and high non-performing assets. The losses incurredon passenger services are cross-subsidized by profits earned throughfreight services as also earnings fromhigher classes of passenger travel. Inaddition, cross-subsidization existswithin the freight services since certaincommodities such as salt, fruits,vegetables, etc. are being carried atmuch below cost of operations. Takingnote of such anomalies wouldcontribute to the efficiency of the railnetwork in the region as Indian railwaysaccount for the major proportion of theregion’s railway network.

Air Network in South AsiaThe civil aviation sector in South Asiahas made significant strides in copingwith the growth of international anddomestic traffic. It is now increasinglyacknowledged that aviation sectormakes an important contribution to theeconomic development of this region andis crucial for sustainable developmentof trade and tourism.

A glance at Table 7.3 makes it clearthat airlines in South Asia have carriedmore passengers than freights in 2001compared to that of 1991. Rise inpassenger traffic is high in smallcountries like Bhutan and Maldives.Since domestic airline industry is partlyliberalized in most of the South Asiancountries, phenomenal rise in passengertraffic is perhaps an effect of suchliberalization. Over and above, most ofSouth Asian countries now have allowed


more foreign airlines to fly within thecountries.

Inland Waterways Network inSouth AsiaWaterways have been found as cheapestmode of movement of goods andpassengers in remotest parts of the SouthAsia. Most of South Asian countries havebeen taking greater interest instrengthening inland waterways systemway back since 1980s. Today, thoughBangladesh, India, Nepal, Pakistan and SriLanka have approx. 25,000 km ofnavigable waterways consisting of avariety of rivers, canals, backwaters, etc.,only 10,740 km in the major rivers and700 km of canals are suitable for operationof mechanized crafts (see Table 7.4).Perhaps, due to lack of proper watertransportation infrastructure, inland watertransport in South Asia constitutes a verysmall part of the total transport networkof the region. In other words, inlandwater transport (IWT) is still not thepreferred mode of transport in SouthAsia. Out of a total freight traffic ofabout 900 million tonnes by all modesof surface transport in 2001-02, IWTaccounts only 25 million tonnes andshares 3 per cent in total South Asianfreight traffic in the same year. In termsof tonnes kilometers, the share of IWTis even less than 1 per cent.

If absence of all weathernavigability is a cause of low freighttraffic in IWT then lack of awarenesstowards preserving and reprocessing ofenergy by IWT is too a reason to blame.There is no doubt that waterway is thecost effective mode of transport. IWTtraffic has cost advantage and fuelsavings compared to rail and roadtransport systems. It was estimated bythe National Council of AppliedEconomic Research (NCAER) that inIndia road transport cost is Re. 1 pertonne km whereas IWT is Re. 0.55 pertonne km inclusive of user and operatingcosts (see Table 7.5). The initial capitalinvestment on track for one km ofwaterway and its maintenance cost ismuch lower than that of railways and


Box 7.2: India’s National Highways Development Project (NHDP)

Road construction is capital intensive and so is its maintenance. Current estimates suggestthat the cost of a four-lane highway works out to roughly INR 45 million per km, and the costof a protected access, six-lane expressway works out to roughly INR 85 million per km. As oftoday, the experiences with tolling suggest that there is limited scope for obtaining user chargesthrough tolls. Instead of charging toll fees for every construction, the Government of India hascreated Central Road Fund (CRF) through Central Road Fund Act, 2000 to fund constructionof national, state and rural roads. This was the financial foundation of India’s ambitiousNational Highway Development Project (NHDP).

Box Figure 1. National Highway Development Project (NHDP)

As National Highways in India comprise about 2 per cent of the total road length in thecountry and yet carryover 40 per cent of total freight, the first and the foremost taskmandated to the National Highway Authority of India (NHAI) is the implementation ofNHDP comprising the Golden Quadrilateral (5,846 km) and North-South & East-WestCorridors (7,300 km), which entails expansion of the existing two-lane highways tofour/six-lanes. In addition to the projects under NHDP, the NHAI is also currentlyresponsible for about 1,000 km of highways connecting major ports and also on NationalHighways 8A, 24, 6, 45 and 27.

Box Table 1. Status of NHDP as on September 30, 2003

Particulars GQ NS-EW PC* Others Total

Total length (km) 5846 7300 363 653 14162Already 4-laned (km) 1408 557 56 153 2093Under implementation (km) 4354 423 113 162 5133Contracts under implementation 90 24 4 4 123Balance length for award (km.) 84 6294 194 338 6962

Note: * Port Connectivity.

Approximately 2093 km, consisting of the 1408 km of GQ, 557 km of NS-EW and56 km of PC and 153 km of other highway projects, have already been four laned, and5133 km are under implementation (see table above ). At present, NHAI is operating130 civil works related contracts for both GQ and NW-ES projects. Out of these, 84 arewith domestic contractors, 11 with foreign contractors and 35 with joint ventures betweenIndia and foreign companies. Financing of NHDP is based on funds from CRF, multilateralfunding agencies like World Bank, Asian Development Bank, Japan Bank for InternationalCooperation, market borrowing and private sector contribution. In terms ofimplementation, innovative contractual agreements are being explored, involving methodssuch as annuities.

Source: RIS based on National Highway Authority of India.


Table 7.4: Total and Navigable Length of Rivers in South Asia

Countries Length of Rivers Navigable Length(km) (km)

Bangladesh 2950 1890India 16000 6000Nepal 2000 500Pakistan 3000 1700Sri Lanka 1050 650South Asia 25000 10740

Source: RIS.

Table 7.5: Operating Costs of Railways, Roadways and Waterways

Distance (km) Railways* Roadways Waterways**

Coal Fertilizer Coal Fertilizer 500T 1000T 1500T

50 23.60 23.40 2700 35.00 13.70 10.30 9.40100 14.60 14.30 21.00 17.40 9.10 6.50 5.80300 8.60 8.40 15.00 19.00 6.10 4.10 3.40

Notes:*Diesel traction single line operation wagons load movement factor.**Self-propelled vessels/capacity at 75% load.Source: RIS.

Table 7.3: Air Network in South Asia

Countries Air Freight Transported Passengers Carried Aircraft Departures(million tonnes per km) (No) (No)

1991 2001 1991 2001 1991 2001

Bangladesh 99.40 169.60 1020800 1450000 13800 6500Bhutan 8000 35100 600 1300India 493.10 517.70 10717400 17272100 117500 214300Maldives 12.60 9400 311100 800 6000Nepal 23.90 16.20 633900 641100 23000 12300Pakistan 373.30 371.30 5197700 4871400 65700 52600Sri Lanka 100.70 217.70 892700 1718500 8200 11300South Asia 218.08 217.52 18479900 26299300 229600 304300

Source: RIS based on World Development Indicators CD ROM 2003.

891 km. National Waterway 2 alsoconnects Northeastern region withKolkata and Haldia throughBangladesh.National Waterway 3: The WestCoast Canal from Kollam toKottapuram (168 km) along withChampakkara Canal (14 km) andUdyogamandal Canal (23 km) wasdeclared as National Waterway 3 in1993. The total distance of NationalWaterway 3 is 205 km.In South Asia, movement of goods

by IWT system is yet to gainmomentum. Against the share of IWTin the level of 8 per cent to 20 per centof total inland cargo for countries likeUSA, Netherlands, China, etc. share ofIWT in South Asia is around 0.1 percent only.

Port Network in South AsiaSouth Asia is endowed withapproximately 9,000 km of coastlinedotted with more than 250 ports.Although there are large number of portsin South Asian coast, only 25 are inoperation and can be treated asprominent ports of this region. Atpresent, these 25 ports together handle366.22 million tonnes of trafficincluding 5.85 million TEUs ofcontainer (see Table 7.6)

Ports are a key component ofinfrastructure in South Asia, whererecent policy initiatives have ushered innew institutional arrangements, andhave yielded results in terms ofmeasurable outcomes such as quickclearence of vessels at ports. Most ofthe busy ports in South Asia have beenpartly privatised like Jawarlal Nehru (inIndia), Karachi (in Pakistan), Colombo(in Sri Lanka), resulting in higherefficiency in operation. Some of theworld’s leading port companies are nowrunning terminals in Pakistan, Sri Lankaand India. Over and above, privatecompanies are also running captiveterminals in this region.

In view of the above analysis, it isclear that South Asian countries dependon transport infrastructure in a major


road. It is therefore, ideal for low value,high volume, non-perishable bulk itemslike food grains, fertilizers, fertilizer rawmaterials, stone chips, coal, etc. It ismore cost effective when origin anddestination of cargo are located on/nearto the waterways. With the advent ofmodern cargo handling system andcargo carriers, developed world hasshown us how efficiently and costeffectively container boxes can even betransported through waterways. Today,approx. 5 million containers per annummove through waterways in TheNetherlands.

India established the InlandWaterways Authority of India (IWAI)in 1986 by promulgating the InlandWaterways Authority of India Act in

1985 for regulation and development ofinland waterways for the purpose ofshipping and navigation. At present,IWAI is responsible for development andmaintenance of India’s following threeNational Waterways.

National Waterway 1: The Ganga-Bhagirathi-Hooghly river systemconnecting Haldia-Kolkata-Farakka-Bhagalpur-Munger- Patna-Varanasi-Allahabad was declared asNational Waterway 1 in 1986. Itcovers a total length of 1620 km.National Waterway 2: The riverBrahmaputra connecting Dhubri-Pandu (Guwahati)-Tezpur-Neamati-Dibrugarh-Sadiya wasdeclared as National Waterway 2 inthe year 1988. It covers a length of


way but there is clear absence ofinterlinking points within the region.While India and Bangladesh havecooperation in IWT, the same betweenIndia and Pakistan is absent. Similarly,in the road sector, even if there is a treatyamong Bangladesh, India and Nepal forallowing free flow of trade overland, itis not functioning properly. There arealso possibilities to connect India andSri Lanka through a bridge, but theproject is not going ahead due to someunknown reasons. Though Karachi portis very near to port of Mumbai, there isno direct call between the two ports.Trade between India and Pakistannormally is transhipped through a thirdcountry.

Thus, a well coordinated approachfor an integrated transport system alongwith the sharing of experiences wouldlead to a better provision of transportinfrastructure in the region.

7.3. Potential forInfrastructure Cooperationamong South Asian CountriesThe South Asian region, with itsgeographical contiguity, has greatpotential for transport cooperationwithin the region. Over the years anumber of initiatives have been takenby the South Asian countries to liberalizeintra-regional trade at unilateral, bilateraland regional levels. Despite theseinitiatives the intra-South Asia trade isnot growing at the expected pace. Thereis need for strengthening tradeinstruments such as transport linkagesamong the members. In today’s worldwhere competitiveness is the keyfactor for a region’s success or

failure, strengthening of infrastructurenetworks in South Asia will pave theway for enhancement of regionalintegration. To attain any sort ofcompetitiveness, countries in South Asiahave to cooperate with each other andshare their experiences in building andoperating infrastructure facilities suchas rail, road, airport, port, waterways,power stations, etc. For example,cooperation in the field of energy willhelp Bangladesh to restructure itscompetitiveness by selling its surplus gasreserve to neighbouring South Asiancountries. Similarly, cooperation in thefield of road network will help Nepal,using Indian soil, to access Bangladeshiroad thereby ports. Likewise, India,using Bangladeshi soil, to access itsNortheastern region. Cooperation ininfrastructure sector is thus very muchimportant for the integration of SouthAsia.

Cooperation in the InlandWaterways SectorSince West Bengal is sharing a longborder with Bangladesh where Kolkatais just 80 km away from the Bangladeshborder and due to absence ofcompetitive and effective modes oftransportation, exporters find it easierto send their goods by roads toBangladesh. However, sea traffic willgo up in this route once these ports takecoordinated efforts to improve theirterminal productivity and IWTconnectivity, failing which tradingregions will become more inefficient,products will loose markets and finallyconsumers will suffer most.

Although year-wise movement ofcontainers between Kolkata/Haldia andChittagong is pretty low2, the samebetween western coast Indian ports andChittagong is encouraging. Table 13.7indicates that ports located at/near toWest and North India share largerbusiness of Indo-Bangladesh sea trade.In 2000-01, India exported 553,000tonnes using sea routes to Bangladeshand imported 102,000 tonnes from thesame country. Since furtherdisaggregated break-up of India-Bangladesh sea traffic is not available,one can presume that most of traffic inthe India-Bangladesh sea route handledat Kandla, Mumbai and Jawarlal Nehru


Table 7.6: Port Network in South Asia in 2002

Countries No of Major Ports* Traffic Container(Million Tons) (Million TEUs)

Bangladesh 2 12.46 0.50India 25 287.57 3.01Pakistan 2 39.92 0.58Sri Lanka 2 26.27 1.76**South Asia 32 366.22 5.85

Note: * It does not consider small/intermediate ports. ** Inclusive of transhipment traffic.Source: RIS.

Table 7.7. Port-wise Throughput (All Commodities)between India and Bangladesh

Ports 1998-99 2000-01

Export Import Total Export Import Total

(in ‘000 tons)

Kandla 184 0 184 190 5 195Mumbai 77 30 107 80 15 95Jawarlal Nehru 160 67 227 145 50 195Mormugao 0 0 0 0 0 0New Mangalore 0 0 0 0 0 0Cochin 1 0 1 2 0 2Tuticorin 5 0 5 0 0 0Chennai 0 0 0 4 0 4Vizag 42 2 44 38 5 43Paradeep 23 0 23 30 6 36Kolkata 30 12 42 46 12 58Haldia 0 0 0 18 9 27Total 522 111 633 553 102 655

Source: Basic Ports Statistics of India, various issues, Ministry of Shipping, Government of India.


Table 7.9: Estimated Cost of Movement of Containers in IWT

Route Cost in IWT(INR./ TEU) Sailing Time (Days)

Kolkata – Haldia 7,600.00* 2Haldia – Narayangunge 11,300.00 8Kolkata – Pandu 15,000.00 15

* Averaging costs of movement of container by flotilla and SPC.Source: RIS based on CIWTC.

Northeast. Cost of movement of boxesis very much required to ascertainbusiness potentialities. As per theestimation made by the Central InlandWater Transport Corporation(CIWTC), in case of transportation ofcontainer from Kolkata to Haldia inIWT, it will cost as much as INR 7600/TEU. Table 7.9 indicates estimatedtransportation cost of container in threeroutes in NWs 1 and 2.

In case of direct operation, i.e.loading/shipment of containers directfrom barge to ship and vice versa usingship’s equipment, handling cost will beINR 650.00 per TEU in place of currentterminal handling charges (INR1980.00/TEU) of Haldia port. Thisbrings down the operational cost furtherand works out much cheaper than theother two modes, as the number oflifting will be less in IWT mode. Again,since there is no maintenance cost forNWs1 and 2, spillover burden will beless. There are also many advantagesin moving containers in IWT such as itsaves energy, protects environment,cuts substantial transaction costs,protects from pilferage and generatesbusiness for private sector.

To begin in this direction, theGovernment of India shall reconstructa concrete jetty at Pandu in Assam.Mobile equipment can be safely placedon the jetty. Bangladesh Inland WaterTransport Authority (BIWTA) shallascertain the feasibility of handlingcontainer at Khanpur. Since Rail-IWTinterface has very high potential formultimodal operation, Bangladesh andIndia shall take policy decision towardsfacilitation of such multimodaloperation. In view of more concrete andmeaningful cooperation, Indo-


Table 7.8: Container Throughput from India to Bangladesh in 2001-02

Origin/Cargo Loading Port Unloading Port Containers(TEUs)

From North India

Yarn, Electrical transformers, Haldia, Jawarlal Nehru Chittagong 3660 Mixed commodities

From Ahmedabad

Milk products, Starch, Pharmaceuticals Kandla, Jawarlal Nehru Chittagong 720

From Kolkata

Yarn Kolkata Chittagong 1800

From Hydrabad

Engineering goods, Slates, Chemicals Chennai, Haldia Chittagong 600

From Delhi

Machinery, Spare parts, Steel wires, Tiles Jawarlal Nehru, Haldia Chittagong 720

From Kandla

Tiles, Soda ash, Laminates, DSL engine Kandla Chittagong 420

From Chennai

CP goods, Machinery Chennai Chittagong 900

Total 8820

Source: RIS based on CONCOR.

ports are containerized. Naturally,containers shipped to Bangladesh fromWest coast ports are transhipped atColombo or Singapore due to absenceof direct calls. Data of ContainerCorporation of India (CONCOR) (givenin Table 7.8) reveals this further.

According to CONCOR, at present,approx. 8,000 container boxes aremoving from India to Bangladeshthrough sea. The port-wise break up ofthis shipment is given in Table 7.8.Basically, yarn, electrical goods, spareparts, machinery, chemicals, etc. are themajor export items which are sent incontainers to Bangladesh. Most of theNorth Indian exportable like electricalgoods, garments, chemicals, foodproducts, etc. amounting to 2000 boxesper annum are exported from Kandla,JNP and Mumbai to Chittagong viaColombo/Singapore. Since this route islong and not cost effective,transportation costs are rising day-to-day. Again, some of the break-bulkitems generated in the North India suchas cycle parts, paper (of Khanna PaperMills) and spare parts, originating atLudhiana amounting to approx. 1440tonnes per month, are at present

transported to Bangladesh by roads.Approx. 1305 tonnes of denim andrelated products, originating atAhmedabad region, are transported byroads every month to Bangladesh.Ideally, this entire cargo can easily betransported by rail with the help ofCONCOR to Kolkata/Haldia and then byusing IWT it can be transported toNarayanganj in Bangladesh.

Thus, looking at the present trendof movement of containers betweenIndia and Bangladesh, it can beconcluded that there is demand to startcontainer operation in IWT modebetween Kolkata/Haldia andNarayanganj.

In the previous sections we haveshown that there is scope for containeroperation by barges in IWT mode fromKolkata/Haldia to Bangladesh and India’s


Bangladesh International Transit Treatyfor IWT operation shall be accorded fora longer period.

Success of India – Bangladesh IWTTreaty can be a useful example for morecooperation among the members ofSouth Asian countries such as betweenIndia and Pakistan, and India and Nepalwhere such potentiality exists in theIWT sector.

Cooperation in Port NetworkSectorSince most of the international trade ofSouth Asian countries is routed throughseaports, due to rising handling costsat ports coupled with operationalinefficiency South Asian exportable areloosing out in the international market.One of the major obstacles to intra-SAARC integration is the poor transportinfrastructure. Specifically, shipsmoving from Bangladesh to the portsof India’s east coast levy higher freightcharges than for the movement toSingapore or Hong Kong. Similarly,there is no direct shipping links betweenports of India and Pakistan.

Due the locational advantage andbetter navigational aids, Colombo portis the hub port of this region. Althoughthere are regular feeder servicesbetween Colombo and most of SouthAsian ports, there are no direct regularcall among the ports of Bangladesh,

India and Pakistan (see Figure 7.1).If lack of sea borne cargo is the

prime cause for low presence ofcontainer traffic in this route thenadvancement of road networks betweenIndia and Bangladesh has taken awaymost of the sea borne traffic. The oceanshipping industry has been dramaticallytransformed in the past 25 years. Shipshave generally become faster and larger,and intermodal container shipping hasreplaced breakbulk cargo vessels onmany routes. Due to advancement ofroad network coupled with globalalliance of shipping companies andexpansion of fleet sizes, India-Bangladesh shipping sector has

appeared as least preferred businessarea for liner shipping agencies.3

However, if the two countries takecoordinated efforts for the improvementof terminal productivity and back uplogistic networks then liner businessmight come back again.

Economic performance of a regionis increasingly shaped by bothtechnological advances and by itscapacity to participate in the globalproduction system characterized byextensive outsourcing, “just-in-time”deliveries, and the ever-more commonshipment of semi manufactured goods,spare parts and final goods betweenproduction and assembly centresscattered across the globe. The decidingfactor for sustainability of anyinfrastructure utility under the liberaleconomic regime is the ability to copewith newer developments. Due to poorperformance of Kolkata port, cargo hasbeen diverted to Vizag (located 650 kmaway from Kolkata on the east coast)and even to Jawaharlal Nehru (located1780 km away from Kolkata on thewest coast). When the port ofSingapore or Laem Chabang (inThailand) clears a vessel within coupleof hours, ports in Bangladesh take 2 to3 days by applying mixed pool of skilledand unskilled labour forces and semi-advanced technology. Ports of this partof the globe are over employed and


Figure 7.1: Present Liner Shipping Networks in South Asia

Box 7.3. Making Efficient Port: Lessons from Port of Colombo

Before Sri Lanka began reforming port operations in 1995, her ports were costly andinefficient. Restrictive trade practices coupled with restrictive labour regulations led to highterminal and labour costs. Colombo port was open rather than terminal based, leading to inefficientoperating practices and unnecessary costs for cargo handling and storage. Port was overregulatedby the Government with overlapping responsibilities. As a result of all these problems, Indianexporters and importers, who share a large portion of total trade of Colombo port, weresuffering. There was no alternative to Indian traders to send their goods abroad. Colombo isideally situated on East-West main shipping route and located nearest to the Indian coast. Dueto rising costs and inefficient operating practices, Colombo’s share in global transhipmenttraffic went down to 69 per cent in 1995 from 72 per cent in 1991. The port was started loosingbusiness of Indian traders; 50 per cent of Indian west-bound transhipment container trafficwas passed through Colombo in 1995 whereas the same was 70 per cent in 1991.

Reforms undertaken by the Sri Lankan Government in 1995 led to improve cost reductionand technical efficiencies at the port of Colombo and conversion of the port into terminal-

Box 7.3 continued

Bangladesh

Singapore

India Pakistan

Sri Lanka

To and from Far East To and from Middle East& rest of the world & rest of the world

Source: De and Ghosh (2001).


based landlord port. This perfect timely decision paid heavily to this port in next few years.In 1997, the Sri Lankan Government brought out National Ports and Shipping Policy committingto convert Colombo as the gateway port to South Asia. Colombo’s share in global transhipmenttraffic increased. In 1997, the port handled 1.27 million TEUs of transhipment traffic which isstill marked as the highest transhipment traffic that the port has ever handled till date. In thesame year, Colombo attracted 67 per cent of South Asian total box traffic; more than a millionTEUs originated from South Asia passed through Colombo which also marked the highest boxtraffic that the Colombo port has ever handled. Gradually, Colombo has emerged as thegateway port for South Asia. Now the Colombo has three dedicated terminals for main linevessels - South Asia Gateway Terminal (SAGT), run by P&O Ports, Jaya Container Terminal(JCT) and Unity Container Terminal (UCT), run by the Sri Lankan Ports Authority (SLPA).JCT has even two additional feeder berths to handle feeder vessels which serve South Asiancoast.

SLPA, the regulator of the Colombo port, never waited in leasing out the terminal toprivate operators soon after SLPA realised that they can not run the port as efficiently asSingapore due to their cemented bureaucracy and other geo-political compulsions. Negotiationsresumed with private terminal operating companies and finally a portion of Queen ElizabethQuay (QEQ), now known as SAGT, was leased out to P&O Ports lead consortium in 1999. In1999, SAGT started operation at the QEQ.

The performance indicators of the port of Colombo suggest a vast improvement sinceinitiation of the reform process. Now, one mainline vessel is cleared within 12 hours from theport whereas it was more than 2 days a decade back. Having invested a considerable amountin the port technology, SLPA is now witnessing the benefits of improved performance. SLPAknows that efficiency benefits all. Today, we have seen rising congestion and port handlingcharges at some of the Indian container ports. In sharp contrast, port of Colombo offersguarantee of clearance of any vessel within a day at much lower handling charges. SLPA offersconsiderable discounts to South Asian cargoes. Normally, the transhipment charge for SouthAsian cargoes is just US$ 50 per TEU which was more than US$ 75 a year back.

Any South Asian container port/terminal will envy Colombo’s SAGT. This year SAGTcompletes four years. With an annual capacity of over 1 million TEUs, SAGT runs 940mlinear berth just opposite of JCT with 15m water depth. SAGT is placing itself as SouthAsia’s first e-Port. SAGT’s web site is packed with information that will meet the customers’most advanced needs. SAGT customers have access to more sophisticated services throughthe e-Port. Shippers, consignees and shipping lines can track their cargo movements on a realtime basis, including demurrage charges up to a given date. Inquiry options, custom reportgeneration facilities, real time vessel operations and productivity monitoring are other featuresof the SAGT e-Port. The web site incorporates some of the best security features to protectagainst unauthorised access and maintain data integrity. There is also SAGT’s e-Port capabilityto provide a total ‘Business-to-Business’ (B2B) solution framework, where customers andsuppliers get access to services such as electronic invoicing and payment, credit inquiries andelectronic delivery processing. SAGT has also introduced terminal service agreements withperformance guarantees. Further improvements attributable to SAGT have been the use ofcomputerised Vessel and Yard Planning Systems and Terminal Management Systems. SAGThas introduced very innovative window berthing programs. This terminal runs 24 hours in aday and 365 days in a year. Shipping lines are better served with the introduction of directbilling to main line operators leading to more benefits for all partners. SAGT also meets thehighest standards laid forth internationally for maintaining occupational health, safety andenvironment protection criteria. Still port of Colombo needs productivity enhancementmeasures combined with the aggressive marketing approach for JCT and SAGT.

To compete in the global market and to serve South Asia better, SLPA has really reformedthe Colombo port over the last 5 years. Approx. 2232m quay line (SAGT+JCT) equippedwith 23 post-Panamax gantry cranes (including 12 super post-Panamax) and 67 rubber tyredgantry cranes is ready to serve South Asian ports efficiently and effectively. South Asia needssuch a facility at its doorstep when the world is becoming borderless. Virtually, for every100m of quay line, SLPA has kept one ultra modern quayside gantry crane ready. Lookingahead, excellent connectivity, the wealth of value-added services provided to shippers andshipping lines, and a pro-business environment have appeared as the strengths that makeColombo as the transhipment hub for South Asia.

Source: De (2003b).

Box 7.3 continuedmostly running with unskilled laborers.Current arrangements for cargohandling for Pakistani, Indian andBangladeshi ports are anything but notconducive to fast handling andturnaround. While West Port Malaysia,terminal operators of Port Klang inMalaysia, make more than 70 moves perhour in handling container boxes byusing super fast gantries and therebyhave earned Fastport Standards, mostof South Asian ports are just not globallycompetitive in terms of any benchmarks. These shortcomings areespecially critical for the container trade,as the waiting cost of large capital-intensive container vessels is high.Sharing performance of port ofColombo could be a way to encouragepublic-private partnership fordevelopment of efficient port networkin this region (see Box 7.3). Naturally,learning from each other’s experiencesand by interacting with globalcommunity, South Asian ports shallimprove its productivity and couldprovide efficient intermodal connectionsto rail and road.

Cooperation in Road NetworkSectorLack of adequate road transport linksamong the South Asian members posesserious problems for the expansion ofintra-regional trade. Also in the roadsector, a trade consignment takesminimum four to six days for clearancefrom Indian border to Bangladesh sideand vice versa. The present legalarrangement between India andBangladesh prohibits Indian vehicle (orBangladeshi vehicle) to cross eachother’s border for delivering theconsignment to the ultimate user(s).Generally, a consignment needsminimum 22 documentations, morethan 55 signatures, and minimum 116copies for the final approval taking intoaccount both sides. Due to this complexand primitive procedure, pilferage isrising which often changes thecomposition and direction of trade.4

Procedural complexities very often work



and Pakistan and India and Bangladeshis not getting the due momentum. Hadthere been an adequate system placedin the region, cost of intra-SAARCmovement of goods such as cement,logs, food grains, salt, etc. could havebeen cheaper. While there is similarityin railway gauge to some great extentbetween India and Pakistan, the sameis missing between India andBangladesh. Mutual cooperationbetween India, Bangladesh and Pakistanwill pave the way for having ‘one trackone system’ connecting Chittagong andKarachi.

In India, there is stiff competitionbetween road and railway sectors inhandling container freight. IndianRailways has started direct containertrain services between (i) Kolkata andDelhi, (ii) Kolkata and Chennai, and(iii) Kolkata and Amingaon (Assam).The Indian Railway Authority isproviding legal guarantee to the users(exporters and importers) forcompensation if the cargo train failsto reach Delhi or Chennai within 48hrs. from the time of departure fromKolkata. Similar services have beenstarted between Mumbai-Delhi,Mumbai-Chennai, and Delhi-Chennairoutes. As a matter of fact, due tothis, approx. 25 per cent of break bulkcargo, which was earlier used to betransported by the road sector, hasnow shifted to rail. Now, IndianRailways is planning to spread thesimilar services between major portsand industrial hubs. Against thisbackdrop, if Bangladesh RailwayAuthority connects Mongla port withBongaon (in India) via Khulna bybroad gauge railway track then inter-country goods movement will befaster, safer and easier. If it is donethen export cargo from Bangladeshwill reach Delhi or Mumbai within 4/5 days, which now takes minimum 15days by road and 18 days by sea.Certainly, this network will helpMongla/Chittagong port to attractSoutheast Asia-bound foreign tradecargo from India (say West Bengal).


as deterrent to India-Bangladesh trade.Some of such obstacles may be notedfrom Table 7.10.

South Asian economies need todevelop regional transportation andtransit system that offers efficienttransportation options and low‘transaction costs’ that are competitivewith those found elsewhere. As the‘shelf life’ of many new productsbecomes shorter and shorter and thespatial distribution of supply anddemand points changes rapidly what istransported, how it is transported, andto where and from where transported,are all rapidly changing. The price ofadmission for a region to this dynamicglobal system is a transportation andtransit system that offers an exportershorter time spans between order anddelivery, and predictable and reliabledeliveries. In order to be plugged intothis wealth-creating machine, SouthAsian economies must develop atransportation and transit facilitationsystem that will greatly reduce currentphysical and non-physical barriers totransportation and transit – by meansof both physical infrastructure (such asmulti-modal corridors and terminals)and non-physical infrastructure(reformed policies and procedures,regulations, and incentives for efficienttransportation and transit).

South Asia needs a common roadnetwork which can connect Colomboto Islamabad to Delhi to Dhaka toKathmandu to Thimpu. At a time whenAsian Highway (AH) is becoming areality, perhaps such a situation is notfar to realise. India-Sri Lanka LandBridge project could be great steppingstone in integrating the economies in thisregion (see Box 7.4 for India-Sri Lankaland bridge project).

Cooperation in Railway SectorRailways being the lifeline of the SouthAsian economy it has immense role toplay in fostering regional developmentin South Asia. Except Bhutan, Nepal andMaldives, rest of South Asian countriesare endowed with modern railwaysystem. Incidentally, due to highoperating costs and cross-subsidizationof services, railway facility is loosingout market share, particularly in freight,to the road sector in South Asia. Overand above, except some periodic trialruns, exporters and importers werenever encouraged to use railway systemfor their trade within SAARC. Forinstance, there is no container train thatruns between India and Pakistan andsimilarly between India and Bangladesh,though passenger trains are runningamong these countries. As a matter offact, trading in bulk items between India

Table 7.10. Transit Time in India-Bangladesh Trade

Road Routes Transit Time Border Crossing Transfer Total Time(Days) Delays (Days) Time (Days) (Days)

Kolkata-Petropole- 1.5 – 2 0.5 – 2 1 – 2 4 - 6 Benapole-Dhaka

Patna-Hili-Dhaka-Chittagong 10 – 15 1 – 3 0.5 – 2 11.5

Guwahati-Shillong-Dawki- 6 – 10 0.5 – 2 0.5 – 2 7.5Tamabil-Chittagong

Road Routes Border Transit Transfer Loss CostsCrossing Costs Costs (% of

Costs (US $/ (US $ / (US $ / valueton) ton) ton) of goods)

Kolkata-Petropole- 2- 3 64 7 – 8 1 Benapole-Dhaka

Patna-Hili-Dhaka-Chittagong 5 – 6 77 9 – 11 1.5

Guwahati-Shillong-Dawki- 5 – 10 8 – 10 7 – 8 < 1 Tamabil-Chittagong

Source: Subramanian (1999).


Box. 7.4: India-Sri Lanka Land Bridge: Proposal

The proposal envisages the construction of a land bridge linking the Sri Lankan and Indiancities of Talaimannar and Dhanushkhodi (in Tamil Nadu) respectively. This permanent linkwill facilitate the effective and efficient movement of both passengers and cargo, resulting inincreased economic opportunities for both countries.

Box Figure 2. Layout of Palk Strait

Adam’s Bridge is a narrow ridge of sands and rocks; mostly dry, which connects MannarIsland (Sri Lanka) with Pamban Island (India), about 18 ½ miles West-North-Westward. It ismostly composed of shifting sandbanks with intricate channels between them. The land bridgeproposed, to be built by connecting the offshore islands found across this ridge with landfills,causeways and/or bridges. It is envisaged that this proposed land bridge should consist of afour-lane highway with a parallel single rail track.

The construction of the land bridge will be mutually beneficial to India and Sri Lanka. Theland bridge is seen as key economic infrastructure to capture the benefits of globalisation forboth Sri Lanka and India. The gigantic Indian market offers Sri Lankan companies immensepotential for export of their food and services. At the same time, Indian investors have alwaysfavourably considered Sri Lanka as an attractive destination for investment and tourism.

According to Board of Investment of Sri Lankan Government, project costs could be inaround US$ 1 billion, which can be considered to be preliminary, as it does not take intoaccount the full cost of investigations and the need to take storm surges into account. One hasto make a more realistic estimate and compare the cost of two alternatives.5 The first option isthe original proposal strengthened to allow for a higher bridge deck and double rail track. Thesecond is the option to build only a short high bridge of total span 2 km and an embankment of28 km length with material from the 78 million cubic meters of material generated by thedredging for the channel. These numbers are to be taken as very preliminary given that no sitespecific subsurface data are available.

For Sri Lanka, the land bridge project offers linkages to industries and agro-industries inSouthern Tamil Nadu that typically are not in direct competition with industrial and agro-industrial activities in Sri Lanka. There is therefore tremendous scope for mutually beneficialinteraction between Sri Lanka and Tamil Nadu ensuing from this project. The Indian South,from the city of Madurai all the way down to Kanya Kumari will provide a hinterland, whichcan access ports in Tuticorin, Colombo, Trincomalee and Chennai once the land bridge isconstructed. This will give the southern Tamil Nadu greater port access than is currentlyavailable. The Rail and Port sectors too can form valuable partnerships. In land transportation,rail has a competitive advantage for high volume traffic, over long hauls. A connection betweenIndia and Sri Lanka will make an effective contribution to bring larger volumes of transshipmentcontainers for the envisaged development of the Port of Colombo. Raw materials from centralIndia, for the proposed industrial activities both in the east and south of Sri Lanka can also betransported through the same route.

In order to proceed with this project, a detailed feasibility study may be commissioned bythe governments with the help of independent consultant.

Source: Dissanayake et al. (2003).

Similarly, industrial belts of Khulnaand Jessore districts will get accessto use Kolkata and Haldia ports if theconsignment is for Middle East, Africaor Europe. Above all, this will generateeconomic opportunity in the backwardregions of Bangladesh and India. Inthe same way, northeastern states ofIndia can use Chittagong port,provided there is good road andrailway track connecting this regionwith the port. This will promoteindustrialization process and therebyemployment in the area.

Cooperation in Air NetworkWe have seen in previous section thatpassenger traffic in civil aviationsector in most of the South Asiancountries including small members hasgone up remarkably during the lastdecade. Open skies policy has allowedprivate players to run domestic airlinesin most of the South Asian countrieswhich has attracted more passengersto fly within the national territory.Over and above, more foreign airlinesare now operating in South Asiancountries which has also helpedforeign tourists to visit this region.But, there are still bottlenecks inimprovement of airports and relatedback up facilities. Mutual cooperationamong the members of SAARC mayhelp its small members such as Bhutanto upgrade its international airport, andbackward region such as airports inIndia’s northeastern region.

To encourage South Asian touriststo travel within the SAARC countries,private airlines in the South Asianregion may be allowed to fly majortourist destinations in South Asia.India’s Sahara Airline’s recentoperation in Sri Lanka could be anexample of such initiative. Similarly,private airlines of Nepal may also beallowed to fly into India’s HimachalPradesh or that of Maldives to India’sKerala. Inter-connection of SouthAsian popular tourist spots by SouthAsian airlines, similar to that ofThailand’s Asia Air, will help promote



option is that governments use transportinfrastructure as an engine for regionaldevelopment. This implies an activestrategy where transport infrastructureis leading and inducing privateinvestment. Although both theapproaches have some pros and cons,many countries have used the latterapproach to attract private investmentsvis-à-vis regional development.

We have good examples of successstories of North American Free TradeAssociation (NAFTA), SouthernAfrican Development Corridors(SADC), Mercosur – the SouthAmerican Customs Union, throughwhich improved transportation andtransit have created great value to theregional economies. As many of theregional blocs have adopted a CommonTransport Policy for enhancement oftheir inter-regional networking,countries in South Asia may alsoformulate a common transport policy(CTP) which will foster trade andtransport in the region. The followinglessons outlined will help to prepare aroad map towards such cooperation inthe infrastructure sector among theSouth Asian countries.

There should be harmonization oftechnical standards such as trucksize and weight regulations, railwaygauge and rolling stocks acrossSouth Asia without which costs forcross-border movement of goodswill go up.There should not be any restrictionsin movement of goods vehiclesregistered in South Asian countriesto move within the South Asia onfulfillment of individual countriesroad transportation rule andregulations. Sometimes residualeconomic regulation, especially inthe form of cabotage rules andrestrictions on the movement ofcertain goods and on specificmodes of transportation increasethe cost of cross-border movement.While planning a common transportpolicy for South Asia, followingissues are to be addressed;


tourism sector of this region andthereby generate employment. Tofoster tourism in South Asia, SouthAsian Airlines, taking equal equity ofrespective South Asian countries, maybe a good idea to resume open skypolicy of the region. When people inPakistan are interested to visitbeautiful sea beaches of Goa in Indiaor people in West Bengal want toenjoy sea beaches of Cox Bazar inBangladesh or people in Maldives areinterested to visit Darjeeling in India,such a network will help them fulfiltheir travel interests. Let there be anopen sky policy in South Asia whichwill foster ‘people to people’ contact inthe region. In view of the above, mutualcooperation shall also be initiated forimprovement of airport networks inSouth Asia without which open skypolicy may not generate desired results.

7.4. Policy Perspective forCooperation in TransportInfrastructureThe need to improve the transportinfrastructure and transit facilities inSouth Asia was first recognized duringthe 11th Session of the SAARC Councilof Ministers held in Colombo in July 8-9, 1992. Accordingly, a study wascommissioned by the SAARCSecretariat to assess the existingtransport infrastructure and transit

facilities, including procedural anddocumental issues in the region inrelation to volume and composition ofthe existing trade in the region. Thestudy was expected to makerecommendations for theirimprovement, with a view to enhancingtrade within and outside the SAARCregion. Although the study wascompleted in 1994 and made somerecommendations, no important actionin this direction has been taken by themember states of SAARC.

It is relevant to mention at this stagethat the Technical Committee onTransport of the SAARC, wasestablished in 1983, to deal with threemajor segments of transport, i.e. landtransport, divided into railways androadways; sea transport sub-divided intoinland waterways and shipping; and airtransport. Though seventeen meetingsof this Committee have been held sofar, a concerted plan for facilitation oftrade and movement of people withinSouth Asia is yet to take-off.

Passive vs. Active ApproachesSouth Asian countries have differentoptions with respect to transportinfrastructure. First, they may invest ininfrastructure as a response to existingbottlenecks. This leads to a passivestrategy of transport infrastructurefollowing private investment. Another

Box 7.5: India – Pakistan Transport Cooperation:Some Stylized Options

Munabao (India) – Khokhrapar (Pakistan) Rail Link: The track was operational till1960s. Besides Wagah in Punjab (India), Khokhrapar was the other point in Pakistanwhich the two countries had agreed to open up in a 1974 border agreement but due tosome unknown reasons this railway track was never became operational. If this railwaylink is reopend, bulk trading between the countries will certainly go up.Srinagar (India) – Muzzafarabad (Pakistan) Road Link: This track was closedin 1947 after partition. This 250 km highway also known as Uri Road whichconnect Srinagar with Rawalpindi in Pakistan through Baramullah, Uri, Kotli andMuzzafarabad. Linking Srinagar with Muzzafarabad will help both the countriesto foster trade.Mumbai (India) – Karachi (Pakistan) Ferry Link: The steam service between thetwo great cities was stopped after the 1965 Indo-Pak war. High speed ferry servicebetween Mumbai and Karachi would be very useful in re-establishing people-to-peoplecontact between the two countries.



Box 7.6: Digital Divide: South Asia’s Readiness for e-Commerce

According to the International Telecommunication Union (ITU) the number of Internet users worldwide stood at 500 million people at theend of 2001, which was an increase of 30 per cent from the end of 2000 or an increase of 115 million. The following table shows the numberof Internet users for the South Asian countries.

Box Table : Population and Internet Population in South Asian Countries in 2002.

Country Population Internet usersBangladesh 133.3 million 150,000Bhutan 2.1 million 2500India 1 billion 7 millionMaldives 320,165 6000Nepal 25.87 million 60,000Pakistan 147.6 million 1.2 millionSri Lanka 19.57 million 121,500

Source: cyberatlas.intenet.com

While more and more people are using the Internet which is a prerequisite for e-commerce, the increase is not indicative of increase ine-commerce. The importance of e-commerce is that it allows enterprises to become efficient in all the stages of their production anddistribution processes.

The adoption of such practices like B2B or e business leads to improved competitiveness and productivity and improvement for theeconomy as a whole. At the country level, the digital and physical sides of the economy will have to be better connected because except inthe service sector B2B e-commerce can work if the physical infrastructure such as ports, railways and roads work. e-commerce takes placeessentially between enterprises so that B2B accounts for 95 per cent of all e-commerce in all estimates. According to UNCTAD (2002b),the proportion of Internet users who are also e-commerce practitioners is lower than average in developing countries, owing to the lower percapita incomes and other factors such as low credit card usage, and. poor logistics. The share of developing countries in e-commerce wasexpected to be 4.6 per cent at $104.9 billion in 2002. The share of Asia and Pacific was expected to be 3.8 per cent at $87.6 billion in 2002.This share is expected to be about 5.1 per cent in 2006. According to UNCTAD (2002b) e-commerce is spreading fastest in the region ofAsia and Pacific than any other region of the world. India’s e-commerce market is estimated at $300 million in 2002. e-mail is the favouriteapplication of India’s 7 million Internet users and very little online shopping is done. As in the other countries PC and telephone penetrationis very low and competition among ISPs is limited. B2B volumes are concentrated in the automotive sector and in banking and other financialservices. However, India has developed a successful IT industry and IT enabled services which we discuss in greater detail below. Theteledensity of India has increased from 3.6 in March 2001 to 4.9 in December 2002.6 The total number of telephone connections stood at50.2 million as of March 31,2002 of which 45 million was provided by the public sector while the rest was provided by the private sector.The number of cellular subscribers increased from 0.3 million as of March 31,1997 to 10.4 million in December 31, 2002.

In Pakistan,7 the Pakistan Telecommunication Company Limited (PTCL) is the provider of infrastructure for connectivity for internetsystem providers, data network operators, software exporters, educational institutions, universities, corporate customers and other users.It has lowered its tariff by substantially in 2001-02. Till March 2003, 1350 cities and towns have been provided with Internet facilitycompared to 850 in June 2002, which is an increase of 58.8 per cent. The promotional Pre Paid Calling Card Service commissioned during2000-01 has been very successful with 9.73 million cards being floated so far. Total telephone lines installed by March 2003 were 4.6 millionas against 3.6 million in June 2002 showing an increase of 27.8 per cent. The Mobile Phone service was launched with U-Fone and mobilephones have reached 2 million by the end of March 2003, up from 1.2 million in June 2002, showing a growth of 66.7 per cent.

In Nepal8, during the first eight months of the fiscal year 2002-03, 83 licences were distributed by the Nepal TelecommunicationAuthority against the 2001-02 total of 67 licenses which included 17 Internet licenses, 10 VSAT service providers, 25 service providers, 8radio paging networks, 1 video conferencing and 6 fax mail services. The corresponding figures for the previous year 2000-01 were 15Internet, 7 VSAT, 23 service providers, 8 radio paging network, 1 video conferencing, 6 fax mail and 1 cellular mobile. The telephone serviceis provided through 159 exchanges with a capacity of 409,833 lines of which 356,323 were in operation in 2002-03 against the 142 exchangeswith a capacity of 375,312 of which 312,032 were in operation in 2001-02. This compares with 275,558 in operation in the previous year2000-01. The number of mobile phones in use were 18102 in 2001-02, up from 11117 mobile lines in 2000-01.

In Sri Lanka9 the total telephone subscriber base which consisted only of wire line in 1990 stood at 121, 388 with a teledensityof 0.7 in that year. Cellular services were launched in 1991 with 1800 subscribers in the year. In 2001 the total telephone subscriberbase was at 1494,857 of 708,200 were wire line and 118,995 were of WLL category. The number of cellular phones in the year was667,662 taking the fixed line teledensity to 4.4 and the cellular teledensity to 3.6 (total teledensity was 8.0). The number of Internetusers in 2001 was 62159 and there were 6801 public pay phone booths, 6178 radio paging and 504 trunk mobile radio operators. Thecorresponding figures for the year 2002 were 768,620 for wire line, 114, 488 for WLL, and 931,580 for cellular. The teledensity forthe year 2002 was 4.7 for fixed and 4.9 for cellular taking the total to 9.6. There were 75000 Internet users in 2002 with 6681 publicpayphone booths, 3541 radio paging, 579 trunk mobile radio. In Bhutan10, teledensity was 2.2 in the year 1999. The installedcapacity of telephones increased from 9126 lines in 1997 to 11831 lines in 1999. The total number of telephone lines was 29316 as ofJune 2003 in the Maldives while the number of mobile subscribers was 51,722 in 2003.11



Avoiding Border inspection exceptin strategic areas leading to ‘onestop service’;Simplification of documentationand clearance procedures;Open sky policy in South Asia forairlines originating from within theregion;Permission to fly South AsianAirlines in the popular tourist placesin South Asia;Movement of container train fromone port of one country to anotherport of another country in SouthAsia; andFinally, but not of least importance,South Asian countries also need topay attention to their telecommuni-cations infrastructure and readinessfor electronic commerce(e-commerce) which is becominga critical factor in internationalcompetitiveness (see Box 7.6).

Endnotes1 Vickerman, 2002.2 De, 2003a.3 De and Ghosh, 2001.4 Subramanian, 1999.5 According to Dissanayake et. al, 2003.6 From the Economic Survey 2002-03 ,

Government of India.7 Pakistan Economic Survey 2002-03.8 www.mof.np/publications/budget2003/

surveyeng.php# and Economic Survey,Ministry of Finance, Nepal 2001-02.

9 Telecommunications RegulatoryCommission of Sri Lanka.

10 Eighth Five year Plan midterm reviewreport obtained from www.pcs.gov.bt

11 Telephone statistics, June 2003, Ministryof Communication, Science andTechnology, Republic of Maldives atwww.mcst.gov.mv/telecom/statistics.htm

ReferencesDe, P. 2003a. “Movement of Containers

Through National Waterways. IndianPorts, Vol. 35, No. 1.

De, P. 2003b. “The Winning Streak”. TimesShipping Journal. Vol. 3, No. 10,www.etshipping.com

De, P, and B. Ghosh. 2001. “TransportInfrastructure and EconomicPerformance of Bangladesh and IndianBordering States.” BIISS Journal, Vol.22, No. 4.

De, P, and B. Ghosh. 2003. “How DoInfrastructure Facilities Affect RegionalIncome? An Investigation with SouthAsian Countries.” RIS DiscussionPaper, New Delhi.

Dissanayake, D.M.P.K. et al. 2003.Exploratory Study of the Proposed SriLanka – India Land Bridge. Paper No.058. Conference Proceedings of theCOPEDEC VI, Colombo, September15-19.

Subramanian, Uma. 1999. South AsiaTransport: Issues and Options. Paperpresented at the Workshop on ‘RegionalInitiative on Transport Integration ofSouth Asia Region’, Bangkok, April19 – 21.

Vickerman, Roger. 2002. “The Role ofInfrastructure for Expansion andIntegration”, in Atalik, G, and M. M.Fischer (eds.): Regional DevelopmentReconsidered. Berlin: Spinger-Verlag.


Transport Infrastructure : Potential and Challenges


8.1 Introduction

Given the manifold ways in whichbiotechnology could influence food

production, it has been considered asan effective means of addressing foodsecurity concerns and poverty reductionin the developing world. It is also beingseen as a major force for economicdevelopment in South Asia, despite thelimits set by funding, facilities andexperienced manpower. In the lastdecade or so almost all the countries inthe region have initiated some activitiesin biotechnology. These programmesare largely designed at keepingagriculture sector at the centre stage.For instance, in Nepal food security isthe stated objective of biotechnologypolicy while Bhutan is attaching moreimportance to the efficacious ex-cituconservation of biodiversity throughRenewable Natural Resource Centres(RNRCs).

However, it seems that South Asianregion faces a major challenge in termsof governance of biotechnology. Theregulatory aspects of biotechnology needan urgent attention in the region. Thebiosafety regulations in some countries arenot in place while others have to workfurther on the gaps between CartegenaBiosafety Protocol and their national

legislations for effective management ofbiosafety. SAARC has provided a forumto exchange experiences, knowledge andexpertise for combined technologicaladvancement of the region. It has alsohelped in working towards harmonizationof biosafety and other regulatory issues.

There are certain challenges whichthe region need to address. The trade inGenetically Modified Organisms(GMOs) is a major area which needsurgent attention. Though this is beingaddressed in the various committees ofWTO, but it would be in the interest ofthe region to work out a commonposition as it concerns conservation ofbiodiversity in the sub-continent. TheSouth Asian region also needs toconsider issues like whether Conventionof Biological Diversity (CBD) shouldprevail over WTO as has been proposedby several other developing countries.The trends in IPR regime withinbiotechnology also needs to be analyzedfrom the perspective of access totechnology in the region. This Chapterpresents the status of biotechnology inthe South Asian countries and deals withtheir national strategies towards furtherdevelopment. The Chapter alsohighlights the contribution ofinternational agencies in theadvancement of biotechnology in the

region. Drawing from the discussion,the Chapter concludes with an agendafor regional cooperation towardsaddressing issues specific to eachcountry and for the region as a whole.

8.2 Trends and Status ofBiotechnologyBangladeshIn case of Bangladesh there is a clearpolicy emphasis on applyingbiotechnology in agriculture sectorprimarily to ensure food and nutritionalsecurity and also for enhancing theexport earnings by supporting industrieslike tissue culture and other activities.In this context a national guideline isbeing evolved to develop high yieldingvarieties of seeds with geneticmodification at the indigenous researchinstitutes. Bangladesh appointed aNational Committee on BiotechnologyProduct Development in 1993. Thecommittee had the responsibility toidentify key areas in which Bangladeshcould commercialize agriculture relatedproducts. Recently, Bangladesh has alsopassed the Biosafety Act 2001.

Bangladesh, being a party to theConvention on Biological Diversity(CBD), has undertaken an internationalcommitment to prepare a NationalBiodiversity Action Plan. Bangladesh is

Biotechnology in South Asia:Issues, Concerns and Opportunities forCooperation

8



also targeting at achieving self-sufficiency of food grain throughintroduction the biotechnology.Government has established NationalInstitute of Biotechnology under theMinistry of Science, InformationTechnology and Communication to takecare of the research activities while theMinistry of Environment and Forest isentrusted with the management aspectsof biotechnology activities. InBangladesh, Biodiversity andCommunity Knowledge Protection Actand Plant Diversity Act are also underreview for possible enactment. Ministryof Environment and Forest is thenotified national focal point for biosafetyprotocol also.

Institutional InfrastructureThe National Council for Science andTechnology (NCST) is the key agencyto work on development of technologyin Bangladesh. On the recommendationof NCST Bangladesh governmentdecided to establish a National Instituteof Biotechnology to work as the centralcoordinating research centre under theMinistry of Science and Technology,Government of Bangladesh. Theinstitute would have six major researchlaboratory on DNA technology; plantbiotechnology; animal biotechnology;fish biotechnology; formation andbioprocessing and bioenergy andfertilizers.1 It is also expected to supportand guide biotechnology research acrossvarious research laboratories,universities and other institutionsengaged in biotechnology.

There are several governmentsupported research organizationsengaged in biotechnology; forexample, Bangladesh Atomic EnergyCommission (BAEC), Bangladesh RiceResearch Institute (BRRI) and fewcrop specific research institutes.Apart from these institutes, there are12 science universities and 30 privateuniversities, having programmes ofbiotechnology. Some of the leadingNGOs in agriculture plantbiotechnology include Debtech and

Proshika which are working in the tissueculture sector.

In case of Bangladesh it is oftenobserved that there is a duplication ofresearch work due to lack ofcommunication among the scientists ofdifferent research institutions anduniversities.2 Mechanisms are beingevolved to avoid such a situation. In thisregard the Bangladesh Association forPlant Tissue Culture (BAPTC) isinitiating a plant/crop specific nationalprogramme involving different agenciesso that a comprehensive view may betaken on various initiatives.

Impact of biotechnologyIn Bangladesh there is a strongmovement for linking up tissue culturewith wider activities of incomegeneration. Some leading scientists haveestablished a society called BangladeshAssociation for Plant Tissue Culture(BAPTC). The Society is regularlypublishing a journal called Plant TissueCulture. The Society also organizesbiannual international meets to catch onwith technology and internationalbusiness. The first two conferencescreated enough momentum for a fewinterested parties to consider seriouslysetting up of tissue culture basedindustry. Within two years as many assix companies were set up, BRAC(formerly, Bangladesh RuralAdvancement Committee) laboratorybeing the largest. One lab which wasset up in Rajshahi focuses mainly oncommercial production of potato microtubers. Now the Society is organizingthe 5th International Conference inNovember, 2004.

Among the possible areas ofapplication of biotechnology from theeconomic perspective is in the areas likerice and jute.3 In Bangladesh riceproduction faces several problems.Major rice pests in Bangladesh includethe stem borer, the rice and Brown PlantHopper (BPH). Transformation of ricewith the Bacillius toxin gene, Bt couldbe effective against the stem borer.Similarly, the major problem with lentil

production is fungal infection causinggreat crop losses. Jute is one of themajor cash crops which is the principalsource of livelihood for millions ofpeople, including three million farmers.The major problem of jute is the pestand the fungus which adversely affectthe crop. It is worth exploring ifbiotechnological approach like asystematic investigation by the bacteriabacillus thuringiensis in both thevegetative and the sporulation may helpto identify suitable toxin effectivenessagainst the jute mite. Bangladesh JuteResearch Institutes (BJRI) has over2000 accessions of jute collected fromSouth East Asia and Africa. Many havedesirable properties like fungusresistance or flood tolerance.

The Food and AgricultureOrganization (FAO) of UN has recentlylaunched a technical cooperationprogramme on biofertilizers inBangladesh. Under the TechnicalCooperation Model Project, FAO isestablishing a demonstration plant forthe large scale production of Rhizobiumbiofertilizers in Bangladesh. It will alsosupport extensive field trials todemonstrate to farmers theeffectiveness of biofertilizers in increasingthe grain yields. Early field trials havealready shown that the technologyincreases grain production by about 25per cent. Large scale adoption can thussave the country an estimated US$ 23million per year in imported grains andsome $6 million annually in importedchemical fertilizers.4

BhutanBhutan has shown a keen interest inbiodiversity conservation relatedinternational activities. It was in 1992itself that Bhutan became signatory toCBD. However, the gains to LDCs fromthis needs to be analyzed afresh (SeeBox 8.1).

The recently concluded 9th FiveYear Plan of Bhutan strengthened thevarious measures taken up in light ofthe commitment towards CBD. In thisregard the National Environment

Biotechnology in South Asia


Strategy was announced in 1999. TheMinistry of Agriculture has alsoestablished a National BiodiversityCentre (NBC) in the year 2000. ThisCentre has initiated some work oninventorisation of biodiversity indifferent parts of Bhutan. The NationalEnvironment Commission (NEC)established with support from UNEPand Global Environment Facility (GEF)is one of the important initiative to evolvea national focal point for environmentand biosafety management.

In Bhutan some initiatives havebeen taken to strengthen the institutionalinfrastructure for first generationbiotechnology.5 The Royal Government

of Bhutan has established two tissueculture laboratories for commercialpropagation of agronomically importantplants. Recently four Renewable NaturalResources Centres (RNRCs) have beenestablished to work on the richbiodiversity available in Bhutan. Theprivate sector participation is yet tocome forward in this area.

International cooperation has helpedBhutan in launching several importantinitiatives. It is with the assistance ofthe Dutch government that a NationalGene Bank has been established. Underthis project the Dutch government isalso providing assistance for trainingtechnical staff. It was in 1985 that

Bhutan had taken the membership of theCentre for Science and Technology ofthe NAM countries and signed theagreement for becoming a member ofthe International Centre for GeneticEngineering and Biotechnology.

IndiaIndia is one of the first few countriesto have recognized the importance ofbiotechnology as a tool to advancegrowth of agricultural and health sectorsas early as in 1980s. India’s Sixth FiveYear Plan (1980-85) was the first policydocument to cover biotechnologydevelopment in the country.6

The plan document proposed tostrengthen and develop capabilities in theareas such as immunology, genetics,communicable diseases, etc. Theprogrammes in the area ofbiotechnology included, as mentionedin the document, application of tissueculture for medicinal and economicplants, fermentation technology andenzyme engineering for chemicals,antibiotics and other medical productdevelopment, agricultural and forestresidues and slaughterhouse wastesutilization and emerging areas likegenetic engineering and molecularbiology.7 Since then the biotechnologysector, in India has come a long way.

Institutional InfrastructureAn apex official agency viz. NationalBiotechnology Board (NBTB) was setup in 1982, to spearhead developmentof biotechnology. The NBTB waschaired by Member (Science) of theIndian Planning Commission and hadrepresentation of almost all the S&Tagencies in the country, viz. Departmentof Science and Technology (DST),Council for Scientific and IndustrialResearch (CSIR), Indian Council ofAgricultural Research (ICAR), IndianCouncil for Medical Research (ICMR),Department of Atomic Energy (DAE),and the University Grants Commission(UGC). In 1986, NBTB graduated to afull-fledged government departmentcalled Department of Biotechnology.


Box 8.1: Bio-prospecting and Access to Biotechnology: Case of Bhutan

Bio-prospecting the search for new genes or chemicals of value in pharmaceutical,biotechnology, or agriculture industries is a rapidly growing endeavor, and one which can haveimmense economic benefits. Several transnational corporations and other firms have used therich biodiversity of developing countries in various products without any payment for thesame. The argument has been that bioprospecting is justified as in most developing countriesthere is no technological capacity for complete product development. In order to avoid this,the Convention on Biological Diversity (CBD) and in particular its Articles 15 and 16 proposedto allow access to genetic resources with the condition that the developing countries should bebenefited by the transfer of technology.

Despite of the fact that Bhutan signed CBD in 1992 and ratified it in 1995 things have notchanged much. Bhutan, as is a well know fact, is rich in biodiversity. It has an estimated 300species of plants and animals which are of immense value for medicinal purposes in formingnearly 200 different traditional medicines but is still struggling for strengthening technologicallyadvanced facility for ex-citu conservation. This is when Bhutan has been contributing to theglobal gene pool quite liberally. An International Plant Genetic Resources Institute (IPGRI)mission to Bhutan in 1981 collected 483 samples of food plants, legumes and vegetables. Themission noted serious threat to indigenous wheat and rice varieties. In 1983, an IRRI missioncollected 184 traditional rice varieties from high and medium altitude rice growing areas, butmost remote areas were not visited. Recently, 154 samples of cultivated rice from 68 villageshave been collected. This germplasm has special value as it has been collected from a very highaltitude areas and traversing about three quarters of the country’s rice growing regions.

Moreover now studies are raising apprehensions about the sustainability of agriculture inBhutan. Here specialized forms of crop production have evolved as a result of its geographyand climate. The narrowness of the genetic base could pose greater risk of crop failure asoccurred in other parts of the world. Many local crop and landraces are being replaced by theseHYV’s, and in extreme cases, traditional germplasms are so rare that they are in danger ofextinction. So far, limited formal germplasm collection has been undertaken in Bhutan.

The country has no medium to long-term storage facility for ex situ collections yet. Thereis concern that loss due to inaction could become expensive; and no time should be wasted incollecting germplasm of major food crops before farming communities succumb to the pressureof population growth, migration to urban areas and a shift toward consumerism. The NationalBiodiversity Centre has been established in 2000 but it has very moderate facilities. TheHerbarium Project funded by Danida, and Agro-biodiversity Project by the Dutch have startedsome form of ex-situ conservation of floral diversity in the country.

Source: RIS based on UNDP (2002), Dupka, Kumbu and Yaganagi, Medon, 2002.


At present in India, there are sixmajor agencies responsible for financingand supporting research in the realm ofa biotechnology apart from othersciences. They are Department ofScience and Technology (DST),Department of Biotechnology (DBT),Council of Scientific and IndustrialResearch (CSIR), Indian Council ofMedical Research (ICMR), IndianCouncil of Agriculture Research(ICAR) and University GrantsCommission (UGC), Department ofScientific and Industrial Research(DSIR). DST, DBT and DSIR are partof the Ministry of Science andTechnology while ICMR is withMinistry of Health, ICAR with Ministryof Agriculture, and UGC with theMinistry of Human ResourceDevelopment. DSIR is the fundingagency for CSIR and both of them fundindependently biotechnology relatedresearch programmes.

Human Resource Development andTrainingThe National Biotechnology Board hadlaunched an integrated short-termtraining programme way back in 1984,to cope up with growing demand forhighly trained manpower. In the firstphase (1984-85), 5 universities wereselected for initiating M.Sc./M.Techprogramme in this multi-disciplinaryarea. Subsequently, in 1985-86 and1986-87, the DBT added 8 universities/institutions for M.Sc/M.Tech/Post-doctoral teaching programmes. In1986-87 a model system of post-graduate/post-doctoral teaching inbiotechnology in 7 universities/institutions was launched.8 Some of thespecialised M.Sc. courses in marine andagricultural biotechnology werelaunched in 1988-89 at 3 universities.In 1992-93, DBT supported a five yearIntegrated Programme in biochemicalengineering and biotechnology in IndianInstitute of Technology, Delhi and apost-doctoral programme at IndianAgricultural Research Institute, NewDelhi.9

The DBT is supporting 20 M.Sc.courses in general biotechnology, 4 inagricultural biotechnology, one each inmedical and marine biotechnology, anda couple of diploma courses inmolecular and biochemical technology.10

The total intake of students in the variouspost-graduate courses supported by theDBT in the country is around 550 peryear. As part of restructuring of the post-doctoral research and trainingprogramme, DBT has scrapped the on-going programme with differentinstitutions and has given thisresponsibility to the Indian Institute ofScience (IISc), Bangalore. This hasbeen done to ensure competitive attitudeand quality output in the life sciences.It is being proposed that IISc wouldaward up to 75 fellowships of two-yearduration in different streams ofbiotechnology.

DBT is also supporting overseasassociateship and short-term trainingcourses for at least 22-25 scientists ina particular year for exposing Indianscientists to newer trends in R&D. Inthis context, services of BiotechConsortium India Limited (BCIL), NewDelhi, a DBT floated organisation, arealso being used to bridge the scientificknowledge of DBT supportedassociates and industry requirement.The State Governments are alsoexploring various options to financehigher education in such advancedtechnologies. Recently Karnatakagovernment has established an Instituteof Bioinformatics and AppliedBiotechnology (IBAB), in collaborationwith ICICI Ventures to offer apostgraduate course in bioinformaticson its International Technology Parkcampus.11

As part of a wider effort forcapacity building in institutes of higherlearning, full-fledged departments ofbiotechnology are being set up. TheIISc, Bangalore, Indian Institute ofInformation Technology andManagement, Gwalior; and selectRegional Engineering Colleges are settingup departments of biotechnology. The

All India Council for TechnicalEducation (AICTE) has alreadyapproved B.Tech. programmes inbiotechnology in eight engineeringcolleges and has been advised to developa model curriculum for undergraduateprogrammes. Apart from expandingteaching of biotechnology at highereducational institutions, a separatemodule on biotechnology would also beintegrated with the school curriculum.The Department of Biotechnology ofGovernment of India will provide thenecessary outline of this module so thatthe National Council of EducationResearch and Training (NCERT) and theBoards of School Education would beaccordingly advised.12

Indian University GrantsCommission has come out with ascheme to promote higher centres oflearning at one place and assist them asmuch as possible. In this regard, Delhi-based Jawaharlal Nehru University(JNU) has been identified by the UGCas centre for excellence in the areas ofgenomics, genetics and biotechnology.13

The University has received funds tothe tune of Rs 300 million and is planningto start a new integrated M.Sc./Ph.Dprogramme in life sciences andbiotechnology and is setting up a modernanimal house for experiments.

Private Sector ParticipationIn India, biotechnology industry hasgrown over the past few years at a veryrapid pace to reach a sizeable scale interms of turnover. According to theavailable estimates, the size of India’smarket for biotechnology productscould be between US $ 1.5 to US $ 2.5billion.14 Of this the agriculture sectormarket is valued between US $ 450 toUS $ 500 million and diagnostic/vaccines market at US $ 150 to US $420 million.

The companies in medicalbiotechnology in India can be dividedinto three broad categories. One is thatof small start-up companies that haveindigenously developed biotechproducts, e.g. Shantha Biotech and



Bharat Biotech. Then there are largecompanies, which have startedresponding to biotechnology and havein fact incorporated biotechnology intheir work plan for instance, Dr.Reddy’s Laboratory (DRL), RanbaxyLaboratories and Wockhardt Ltd. Thethird group has start-ups, which are allset to emerge as contract researchorganisations (CROs). Largely theirwork comes from TNCs.

Then there are companies likeBiocon India which may not fit well inthis kind of classification as they havean established presence in the industrialbiotechnology (the fermentation sector)and a growing presence in thepharmaceutical sector. Biocon set itssights on biopharmaceuticals and usingits capabilities in a wide range offermentation technologies.15

Some of the private foundationssuch as M. S. Swaminathan ResearchFoundation (MSSRF), Chennai havetaken important initiatives in terms ofbridging gap between technologydevelopment, its commercialisationand diffusion.16 One of the importantprojects MSSRF launched in early1990s was establishment of Biovillagesin India and China. The Biovillageapproach aims at covering principlesof ecological sustainability andeconomic profitability with equity.Some of the firms such as Indo-American Hybrid Seeds Company,Bangalore and R&D institutions suchas Tamil Nadu Agricultural Universitywere the prominent partners. Thisproject boosted the demand forbiofertilisers in the Southern Indianvillages.

In the agriculture sector a largenumber of companies have taken upactivities related to biotechnology.Leaving aside subsidiaries of TNCs inIndia, the agribiotech companies can beclassified into three broad groups. Inthe first group there are larger integratedseed companies which are expandingtheir R&D to cover biotechnology likeMahyco, Indo-American Hybrid Seed,etc. to develop their own transgenics.

Second group is that of smallercompanies which have not been activein research or product development buthave started employing techniques suchas tissue culture for their breedingprogrammes, e.g. companies like KasturRangan and Adikeshevalu. The thirdgroup may cover highly specializedtechnology companies that undertakeservices for specified research, likecontract research organisations. This isa relatively new concept in theagriculture R&D in India. Some of thecompanies like Avesthagen qualify in thisgroup.

Role of Financial InstitutionsIn recent times, liberalization hasunleashed competition for garneringcapital in the Indian market. This ismore so for technology companies.Some of the major firms in IT andpharmaceutical sector have alreadyachieved a listing at Nasdaq. The venturecapital (VC) industry in India is alsoemerging as a vibrant sector to supportinformation technology, biotechnology,telecommunication and food processingrelated industries.

The biotechnology commitmentsby different VCFs amount to almostRs. 3000 million (Figure 8.1). Out ofthis, Indian Credit and InvestmentCorporation of India (ICICI) and SmallIndustries Development Bank of India(SIDBI) have almost similarcommitments for biotechnology whilenew entrants like Kerela Venture CapitalFund (KVCF) has committed Rs. 200million, which is just 4 per cent of the

total venture capital. SIDBI and ICICIhave devoted Rs. 1000 million and Rs.1700 million, respectively. The twoother southern states pro-activelysupporting biotechnology throughventure capital are Andhra Pradesh andKarnataka. Andhra Pradesh IndustrialDevelopment Corporation (APIDC) hasdevoted Rs. 500 million, which is 18per cent of the total amount available atthe national level while Karnataka StateIndustrial Infrastructure DevelopmentCorporation (KSIIDC) share 7 per centwith an allocation of Rs 100 million.

NepalRecently, Nepal has started giving highpriority to biotechnology. The Ministryof Science and Technology of Nepal hasplaced its vision for biotechnology inNepal to enhance the quality of life ofthe Nepalese people in terms ofagriculture, forestry, health, safety,environment, social and economicdevelopment. The newly draftedbiotechnology policy for Nepal with itsmain focus on poverty alleviation wasrecently released.17

In Nepal a strategy for developmentof biotechnology is being worked outlargely in the agriculture sector. Thestated objective is to provide easy andaffordable excess to biotechnologyproducts and appropriate inputs suchas biofertilisers, etc. to agriculturistsespecially small and marginal farmers.The areas of priority for research anddevelopment include mass productionof virus-free pre-basic seeds of potatoby tissue culture; mass production ofdisease-free banana and citrus saplingsby tissue culture and grafting;production of virus-free cardamomplantlets; biotechnological developmentof poor man’s food crop – millet, barley,buckwheat, etc; development of yield –increasing rice varieties by combinationof conventional breeding, markerassisted breeding, anther culture andgenetic transformation; mass productionof biofertilizers and biopesticides.18

Nepal has also actively startedorganizing major conferences and


Figure 8.1: BiotechnologyCommitments of VCFs in India

Source: RIS data based on several sources.


seminars on biotechnology andbiodiversity. One such major conferencewith almost 265 scientists from twentyfive different countries was organizedin Katmandu in 2000.19 This gave anopportunity to local industry andacademicians an opportunity to interactwith others in the field.

Institutional InfrastructureNepal is one of the few LDCs whichhas strong institutional infrastructure forbiotechnology in government as well asin non-government sector. The non-government sector is largely in thedomain of private sector with limitedfinancial support from communitybased development programmes. Someof the major initiatives in non-government sector include BotanicalEnterprise Private Limited, Godavari;Nepal Biotech Nursery, Bhainsepati;Research Laboratory for AgricultureBiotechnology and Biodiversity(RLABB) Balkhu and Microplants,Taukhel.

Under government, there are threemajor institutes which supportbiotechnology. They are Department ofPlant Resources (DPR), NepalAgriculture Research Council (NARC)and Royal Nepal Academy of Scienceand Technology (RONAST). The DPRis largely working on mass propagationof tissue culture disease- free plants ofbanana and citrus. The DPR has alreadycome out with their biotechnology actionplan. The NARC has an activeprogramme on developing virus freeseeds of potato. The agriculture botanydivision of NARC is working on antherculture of rice and wheat and is also allset to establish germplasm conservationand diagnostics facilities using PCRtechnology.20 The NARC is alsoplanning to initiate some work onbiofertilisers. It has established regionallinkages with Nepal by establishinglaboratory in different parts of thecountries.

The RONAST has initiated work onmolecular studies on genetic variationof rhizobium and in vitro grafting of

citrus for disease elimination.21

RONAST has screened more than 80isolates of rhizobium for enhancingproductivity of grain legumes.

Central Coordination and otherDevelopments in BiotechnologySince the Eight Five Year Plan planningin biotechnology has come a long wayin Nepal. This was the first plan inwhich importance of biotechnology andbiodiversity was acknowledged. TheNational Council for Science andTechnology, however, has been activein terms of developing and supportingvarious facets of biotechnology. At thispoint, Nepal has to work towardsfurther strengthening the institutionalcoordination and also establish the interlinkages in the biotechnology research inthe country. There are several studieswhich indicate that there is an urgent needof a central coordinating agency in Nepallike Department of Biotechnology (DBT)in India or Biotechnology Commission inPakistan.22 This may help in coordinatingallocations for various programmes inbiotechnology: for instance Panta andAryal (2000) mention that such fundingis needed for a strong programme at theadvanced research institutes likeTribhuvan University. The CentralDepartment of Botany (CDB) inTribhuvan University has been planningfor initiation of biotechnologyprogramme but due to lack of properfunds the programme could not bestarted. In this regard the proposal forBiotechnology Development Council(BDC) or Biotechnology CoordinationCommittee (BCC) is an important ideafor advancement of biotechnology inNepal.

There is an acute shortage oftrained manpower in this advancedtechnology. The recently concludedNational Biotechnology PolicyConference (NBPC) also discussed thisissue. It was suggested that one of thetwo committees BDC or BCC wouldhave to take some steps in thisdirections. Some of the earlier studiesby Yami (1997) and Tuladhar (1994)

indicate that there were only 72graduates out of which 57 per cent hadmasters degrees and 32 per cent haddoctoral degrees. Most of them havespecialized in either agriculture or inbotany but not in biotechnology. Theproposed biotechnology coordinationcommittee is being identified as theagency for developing manpowerrequired for this sector and raise publicawareness about biotechnology.

PakistanIn Pakistan the government has takenan active interest in promotion ofbiotechnology. A National Commissionon Biotechnology was announced andnearly a sum of US$ 0.5 million allottedto coordinate the national efforts in2001. The NCB would have 10-11members. This commission wouldsponsor research in the areas ofagriculture, food, flowers and fruits andwould also initiate programmes andpublications to create mass awarenessabout biotechnology.

Pakistan’s Ministry of Science andTechnology (MOST) has approved aproject for the promotion ofbiotechnology research and preparationof a biotechnology action plan. Theproject will be implemented by thePakistan Council for Science andTechnology in a period of three yearswith a Rs. 38 million (around 634,000USD) budget beginning from April2003. Biotechnology is declared amongthe top priority areas in the third meetingof the National Commission for Scienceand Technology. The project waslaunched to improve the existingresearch facilities in the areas likeagriculture, livestock and medicalsectors at universities and R&Dorganisations.23

Institutional InfrastructureThe biotechnology programme actuallystarted with the establishment of theNational Institute for Biotechnology andGenetic Engineering (NIBGE) atFaisalabad in 1987 by the PakistanAtomic Energy Commission (PAEC).



This institute has emerged as animportant linkage in the advancementof biotechnology in Pakistan. However,the whole idea about the instituteemerged in 1981 when a course onrecombinant DNA technology wasorganized by the Nuclear Institute forAgriculture and Biology (NIAB) atFaisalabad.24 At that time NIAB was oneof the three agricultural centres of thePAEC. The training workshop asked thegovernment of Pakistan to develop anational centre of biotechnology andgenetic engineering. The Ministry ofEducation later approved the creation ofa Centre of Excellence in MolecularBiology (CEMB), to be built on thecampus of Punjab University. TheNational Institute for Biotechnology andGenetic Engineering (NIBGE) wasapproved in 1986. NIBGE was developedby Government of Pakistan with theinvestment of US$ 10.00 million.

Now the government is alsosupporting some other initiatives suchas the Centre for Advanced MolecularBiology (CAMB) and the Institute ofBiochemistry and Biotechnology (IBB).Recently an Institute for Biotechnologyhas also been established at Karachi.

Impact of BiotechnologyThe biotechnological interventions havecontributed significantly towardssustaining the cotton production in thewake of an acute epidemic of cottonleaf curl virus.25 In addition,development of virus-free potato seed,banana and micro-propagation ofsugarcane through tissue culture areonly some examples of biotechnology.Commercialization of biofertilizers forrice, wheat and legumes has also comeabout because of the biotechnologyresearch carried out at NIBGE andNARC. According to a studyintroduction of the Bt cotton in Pakistancould result in a 45-55 per centreduction in insecticide use on cotton.26

This would mean a benefit of about Rs.4 to 5 million, apart from the favourableimpact on the environment and increasein cotton yield. So far, transgenic plants

have been produced in about 60 plantspecies. Cotton has received specialattention of the biotechnologicalcompanies in the developed countrieswho were attracted by the profit motivesassociated with the high value added tothe transgenic seeds.

NIBGE has become internationallya lead centre for research on cotton leafcurl virus by deciphering the virusgenetic code and documenting thegenetic diversity existing in the field.27

A useful input from University ofArizona, Tuscon; John Imn Centre,Norwich, UK; Imperial College andQueen Mary College London resultedin accumulation of useful data, whichis now being utilized for developingtransgenic cotton resistant to CLCuV.Similarly, establishment of a PlantGenomic Laboratory in collaborationwith PARC (Pakistan AgriculturalResearch Council) is a step in rightdirection. The Institute has also excelledin the area of biofertilizers with supportfrom IAEA and more recently fromIslamic Development Bank throughwhich Biofertilizer Resource Centre(BIRCEN) has been established atNIBGE. Commercialization ofbiofertilizers under the trade name ofBioPower is greatly helping indevelopment of sustainable agriculture.Pakistan has an active programmesupporting biopesticides (Table 8.1).

Private Sector ParticipationIn Pakistan, the first generationbiotechnology is still to becommercialized at a large level. Almost

all the plant tissue culture (PTC)laboratories are in public sector anduniversities. Despite noticeablecontribution in basic research in PTCtechnology, commercial exploitationremains insignificant. Generally,research in Pakistan is based on publicfunds and the interest of researchlaboratories does not match with thoseof industry or the results are technicallyimmature.28 Thus, no commerciallyviable plant tissue culture laboratory hasbeen established in private sector, in anypart of the country. However,Agriculture Biotechnologies Pakistan(Pvt) Ltd. is operating in the field ofmicro-propagation and seed productionsince 1995 to achieve the excellence inhigh tech agriculture.

Among the TNCs in the privatesector Monsanto Pakistan is one of theactive players. It acquired Cargill hybridseed business in Pakistan in 1998.Monsanto also acquired Dekalb Geneticsand Asgrow business worldwide, givingPakistan an access to wide range ofsuperior genetics. Monsanto deals withproprietary Corn, Sunflower andForage Sorghum hybrid seeds. As partof a commitment, Monsanto is the onlymultinational producing and marketinggenetically modified seeds. Monsantohas initiated some work on producingdrought tolerant plants.29 Although theresearch is in the initial stages, the resultsare encouraging. Scientists are workingon the project by sequencing the genesin corn, soy, and rice genomes.

NIBGE has also established aprivate commercial arm. This is called


Table 8.1: Biopesticides Programmes in Pakistan

Centre Mechanism Crops Status

AEARC Control of pests by Sugar cane/cotton Small commercialparasitoids/predators venture

IIBC, Rawalpindi Control of pests by Sugar cane/cotton Small commercialparasitoids/predators venture

ITAR Karachi (PARC) Neem-based formulation Cotton STADE/PCSIRNimolene

CAMB, Lahore Novel Bt biopesticide Cotton/rice Lab scale

CAMB, Lahore Fungi-based pesticide Cotton Lab scale

Source: RIS, Based on Zafar (2001)


Pakistan Innovative Biotechnologyservice (PIBS). The mandate of PIBSis to expedite the commercialization oftechnologies applied in various sectorsof the industry and agricultural fields,which might have a direct and indirectimpact on economy.

International CollaborationsPakistan has also initiated jointcollaboration programme withneighbouring and other countries.Recently Pakistan has entered in anagreement with China. The areas ofcooperation include agriculture, healthand industrial biotechnology.30 Theyhave decided to facilitate the exchangeof microbial culture to enhancefermentation technology capabilityalong with the exchange of visits ofscientists. The action plan alsoincluded submission of joint researchprojects to be reviewed by scientificcommittees on both sides and theirsubsequent implementation. It has alsobeen decided that students will beexchanged at graduate level and post-doctoral level. Exchange of eminentscientists as teaching faculty toparticipate in the academic activities ofnational universities and institutes willalso take place. As of now 72 projectshave been submitted to the Ministry ofScience and Technology by variousR&D organizations. They would bescreened for undertaking jointresearch projects under Pak-China jointResearch Fund.

Pakistan and the United States havealso signed a joint operating arrangement(JOA) worth $10 million for scientists’cooperation in the field of naturalsciences.31 The arrangement has beendesigned for further cooperation amongscientists of the two countries in theareas of mutual interest with a focuson collection, evaluation and exchangeof germplasm, plant genomics, plantbiotechnology, stress biology, bio-informatics, application of informationtechnology in agriculture, identificationand control of animal and plant diseases,dry land/sustainable agriculture

production systems, biotechnology/microbiology and agribusinessdevelopment. Recently, Pakistan hasalso been benefited by the AsianDevelopment Bank loan of $905,000 forthe research and cultivation of iron-richrice. The project would be from 2002to 2005.

Pakistan is member of IslamicAcademy of Sciences (IAS). Thisinstitution organised a special sessionon biotechnology and geneticengineering.32 In 2001, IAS adopted aRabat Declaration, urging leaders anddecision-makers of the OIC membercountries to divert available resourcesto science education with a view tobuilding a scientific and technologicalmanpower-base capable of adapting anddeveloping new technologies. The RabatDeclaration equally stressed the need forOIC countries to introducebiotechnology programmes at variousstages of the educational process.Among the countries from South Asia,apart from Pakistan, Bangladesh alsosigned this declaration.

Sri LankaSince 1990 Sri Lanka has been havingstrong research programme inbiotechnology. In the initial year thefocus was on plant biotechnology butof late the various research institutions,universities and government departmentshave entered in the areas of newbiotechnology including health andmedical biotechnology. In Sri Lankathere is a growing sensitivity about theethical aspects of biotechnologyresearch. Earlier this year, the NationalScience and Technology Commission(NASTEC) had handed over a report tothe Government on the medical ethics.At this stage, a ‘Draft National Policyon Biomedical Ethics’ related to ‘NewGenetic and Assisted ReproductiveTechnologies’ was also considered.

In Sri Lanka there is already aNational Genetics Commission and theNational Assisted ReproductiveTechnologies Commission is to be setup soon. The National Assisted

Reproductive TechnologiesCommission set up by an Act ofParliament would be the apex bodyoverseeing the introduction and practiceof assisted reproductive technologiesboth in research and in clinical settingsin Sri Lanka.33

Institutional InfrastructureThe Ministry for Economic Reform,Science and Technology (MOST)provides a framework for the strategiceconomic development and growth ofthe country. In Sri Lanka the NationalScience and Technology Commission(NASTEC) plays the key role in termsof working as a key apex policyformulating and advisory body to theGovernment of Sri Lanka on Scienceand Technology matters. This wasestablished in 1998. It works inconsultation with National ScienceFoundation (NSF).

NASTEC fulfills a need that hasbeen highlighted for a long time by thescientific community. This works as thepolicy making apex body in the area ofscience and technology. Itsresponsibility includes prioritization ofareas of national importance of Scienceand Technology, and in advising theGovernment as regards the rationalallocation of funds for research anddevelopment among the nationalScience and Technology institutions.NASTEC also works closely with theCouncil for Agricultural Research Policy(CARP) and the National HealthResearch Council (NHRC) andprofessional bodies such as Sri LankaAssociation for the Advancement ofScience (SLAAS), Institute ofChemistry, Institute of Physics, Instituteof Engineers and Institute of Biology.

The Plant Genetic Resource Centre(PGRC) is the key institute in Sri Lankato collect, characterize, conserve andmultiply germplasms of crops and otherplants. This institute was establishedwith the liberal grant from Japan in1987. The PGRC is under the Ministryof Agriculture. Under the same ministryis the Horticultural Crop Research and



Development Institute (HORDI). Thishas also started exploring the firstgeneration biotechnology options intheir various research pursuits

The Council for AgriculturalResearch Policy (CARP) also ofMinistry of Agriculture has identifiedbiotechnology as a thrust area foragricultural research and a key area fordevelopment on a national scale.34 Inview of this, the CARP committee ofspecialists in biotechnology and plantbreeding in the national agriculturalresearch system (NARS) was requiredto identify constrains confronted withresearch relating to biotechnology andto suggest possible ways as to howCARP can play a role in developingbiotechnology to benefit agriculturaldevelopment of Sri Lanka.

Strong Emphasis on Ethical AspectsThe guidelines for the Proposed NationalGenetics Commission and the NationalAssisted Reproductive TechnologiesCommission have been worked out byan expert group appointed by theNASTEC. The group has also drawnguidelines on how researchers shouldliaise with the media. It suggests thatthe preliminary findings of seeminglypromising research should be reportedbecause such research may requiresubstantial validation through futurestudies or as such projects may requirefurther research and a considerablepassage of time before it could betranslated into human use although itmay seem that human application isround the corner. It is also important tosafeguard against inaccurate reportingand to ensure that privacy andconfidentiality of subjects is notcompromised especially in publishingfamily histories and in publishing orpresenting photographs, slides, videosof subject(s); prior consent to do soshould be obtained.

The guidelines also suggest that theinternational collaborative researchprojects should, in addition to ethicalclearance in Sri Lanka, receive clearancefrom the ethical review committee(s) of

the collaborating institution(s) abroad andbe subject to other guidelines forinternational collaboration as may berecommended by the proposed GeneticsTechnologies Commission and/or theproposed National Assisted ReproductiveTechnologies Commission.

The guidelines to be drawn up bythe proposed commissions shall, inaddition to other factors, take intoaccount the need to ensure transfer oftechnology to Sri Lanka so that suchresearch projects result in thedevelopment of research capacity withinthe country and not merely the transferof biological material to other countries.The export/import of biological materialfrom/to Sri Lanka should be banned atall times except where it is justified byestablished medico-legal practices.

The Economic ChallengesThe strong institutional linkages in SriLanka have created a system where byscience and technology is being usedto overcome the economic challenges.In this regard CARP has identified someof the important areas for the potentialapplication of biotechnology. In SriLanka rice is the staple food and is alsoone of the important food crops of thecountry. It is estimated that Sri Lankashould produce at least 3.4 milliontonnes of rice to cope up with thedemand by 2005. The major constraintcomes from the pests of rice that causereduction in yield. High cost wasincurred for use of pesticides andchemicals for disease control.Moreover, yield losses due to weedcompetition alone exceed losses causedby other biotic constraints. The use ofherbicides is the most commontechnique used by farmers to controlweeds in rice fields.

The major plantation crops of SriLanka are tea, rubber and coconut. Thetrend in production and export of thesecrops as given below show a gradualincrease in tea and coconut and a declinein rubber. The cost of production hasincreased dramatically in all the threecrops.35 Tea improvements require

expansion of the existing narrowgenetic base, improvement ofassessment of germplasm, andproduction and use of new genotypessuch as polyploids. Rubber requiresimprovement of technical properties ofthe natural rubber, shortening of theimmature period, improvement of timberand assessment of merit of theaccessions. Coconut improvementrequires development of vegetativepropagation methods, broadening thegermplasm and reducing the time andcost of breeding new varieties.

Sri Lanka has right from thebeginning focused on the need oftrained manpower in this skill intensivesector. The National ScienceFoundation found the availability oftrained manpower even in someadvanced biotechnology in Sri Lanka.The major challenge is to encourageprivate sector participation indevelopment of biotechnology. Theprivate sector as of now is largelyengaged in tissue culture andbiopesticides related activities. Genetechis one of the leading firms in Sri Lankaengaged in DNA typing and fingerprinting.

The initiative by various universitiesand research institutes of makingavailable high skilled manpower in areasother than plant biotechnology is likelyto encourage private sectorparticipation. The universities havedeveloped curricula to include moderntrends in biotechnology research anddevelopment. In this regard the AsianDevelopment Bank has also provided $20,000 as part of the loan for expandingscience and technology personneldevelopment in 1987. As a resultUniversity of Peradeniya has establishedunder graduate and post graduate coursein biotechnology. With this moneyinfrastructure has been upgraded at theUniversity of Colombo.

International CooperationThe research cooperation between SriLanka and the Swedish InternationalDevelopment Cooperation Agency



(Sida) has been in operation since1982.36 National Science Foundation(NSF) of Sri Lanka has beenfunctioning as the coordinating agencyfor many projects under the agreementsigned by the governments of Sri Lankaand Sweden. SIDA and NSF havelaunched a two-year project toestablish bioassay techniques toidentify insecticidal and other bioactiveextracts, fractions and compounds.This project would help in protectingmajor export crops such as tea andother crops from pest attack. Thisproject also aims at developingstrategies for environmentallyacceptable methods of control of sevenSri Lankan pests; the shot-hole borerbeetle, the live-wood termite, the root-lesion and burrowing nematodes of tea,the groundnut aphid, the diamond-backmoth and the cowpea beetle.

Another major area of cooperationwith Sweden includes the establishmentof a molecular biology and genetechnology department in the Facultyof Medicine at the University ofColombo. Two areas were identified asof primary importance: training ofmanpower resources at the M.Sc. andPhD level and research and developmentin this field as applied to the study offilariasis. Research collaboration andtraining has been undertaken with theDepartment of Medical Genetics,Biomedical Centre, Uppsala University,Sweden.

Recently during the US visit of theSri Lankan Prime Minister a number ofagreements to further businessopportunities in the knowledge economysectors such as biotechnology,Information and CommunicationTechnology were signed. AMemorandum of Understandingbetween the Government of Sri Lankaand the US Trade and DevelopmentAgency (USTDA), which enablesfunding for technical assistance,feasibility studies, training, orientationvisits and business workshops withparticular attention to biotechnology,was signed.37 This initiative may help

in strengthening the bioinformaticsprogramme in Sri Lanka.

Sri Lanka also has four on-goingresearch projects with India. Bothcountries have serious economicinterests in aquaculture. In a jointproject at College of Fisheries,Mangalore, efforts have been made todevelop cell lines for marine fish Sillagowhich is commonly available in theregion. At National EnvironmentEngineering Research Institute(NEERI), Nagpur projects have beenlaunched to study and evaluatebiotechnological processes fortreatment of waste water.

Sri Lankan biotechnologyprogramme is also being benefited bythe programmes supported by the subregional grouping such as by theBIMST-EC. This regional grouping wasestablished in 1997 and comprises ofBangladesh, India, Myanmar, Sri Lankaand Thailand. The purpose of thisregional grouping is to provide trade andtechnological cooperation among theBIMST-EC countries in the areas oftrade, investment, tourism, transport,commerce, technology, energy andfisheries. National Science andTechnology Commission is the focalpoint from Sri Lanka for science andtechnology cooperation. The secondExpert Group Meeting was held in SriLanka in October 2002. The focus ofthis Expert Group Meeting wasAgricultural Technology, Biotechnology,Food Technology, Herbal Drugs andAromatic Plants, Post-HarvestTechnology and Information andCommunication Technology. Theseareas were chosen because of thecommon agricultural background of theBIMST-EC countries and the ever-growing importance of ICT. Theidentified areas for R&D collaborationbetween Sri Lanka, India and Thailandinclude the following:1. Establishment of a Database on

Medicinal Plants, Bioactive NaturalProducts and Mushrooms

2. Establishment of a Database onTraditional Knowledge

3. Bio-Fertilizer and Bio-Pesticides4. Methods of Identification of

Functional Foods5. Policy Formulation and

Development of IdentificationProtocols and Validation on GMFoodsBasing on the identification of these

areas seven joint projects have beenlaunched as part of BIMT-EC initiativefor technology cooperation.

8.3 International Institutionsin the RegionAdvancement of biotechnology in theregion is also facilitated by the presenceof advanced research institutes. InSouth Asia there are two majorinternational institutes having strongregional linkages: International Centrefor Genetic Engineering andBiotechnology (ICGEB), New Delhi andInternational Crops Research Institutefor the Semi-Arid Tropics (ICRISAT),Hyderabad. They have established closeties with the farmers and industrialsector for the transfer of innovativetechnologies and/or products ofpotential interests. These institutionshave also played a key role in humanresource development in the region.

ICRISAT has launched severalinitiatives in South Asia and some ofthem are financially supported bymultilateral financial agencies. Forinstance, ICRISAT and ADB werepartners in two bilateral projects, onewith Pakistan and the other with SriLanka.38 The project on strengtheningchickpea research in Pakistan workedtowards stabilizing yield of the crop, andsuccessfully developing a variety ofchickpea which is resistant to thedamaging fungus aschochyta blight. Incase of Sri Lanka the initiative coveredthe production of pigeonpea anddiversification to other crops. Theproject developed a maruca resistantvariety which is a short durationpigeonpea, and also designed anddeveloped a processing machine forsmall farmers. The establishment of aplant biotechnology research and



training unit at ICRISAT and its state-of-the-art Applied Genomics Facility hasfurther strengthened the biotechnologyinfrastructure in South Asia. The facilityhelps train NARS scientists in tissueculture, transformation, molecularmarker technology and in virusdiagnostics. Recently the ICRISATgenebank was augmented, training ingenetic resources was provided, and 22germplasm collection missions in 13countries resulted in the addition of10,955 accessions to the ICRISATgenebank.

The Regional TechnicalAssistance (RETA) grants from ADBunder cooperation programme withICRISAT has also strengthened thegrain legume research in South Asia

and also strengthened the regionalcollaboration in cereals and legumesin Asia (1995-99). This workedtowards assisting NARS in Asia toimprove productivity of grain legumesand coarse cereals. Legume-basedtechnologies for rice and wheatproduction systems in South andSoutheast Asia (1997-April 2001) isan ongoing project designed toquantify the scope for greaterinclusion of legumes in rice and wheatcropping systems, evaluate improvedtechnologies, assess adoption, andquantify the impact of improvedlegume-based technologies.

International Centre for GeneticEngineering and Biotechnology(ICGEB) is an international organisation

dedicated to research and training in thefield of biotechnology and geneticengineering. There are two componentsTrieste (Italy) and New Delhi (India).The main mandate of the centre is toimpart research and training in the fieldof biotechnology. ICGEB also helps indeveloping cost effective technologiesin the field of human health and plantbiotechnology. As Table 8.2 shows, inthe region Sri Lanka and India havebenefited at the firm level by gettingaccess to the technologies developed byICGEB. The centre has conducted morethan 100 training progrmmes andtransferred number of technologies tothe member countries.

8.4 Biodiversity Conservationand CBDThere is a growing concern aboutrapid degradation of ecosystems andtheir biological components in the SouthAsian region. Developing andestablishing adequate conservationmeasures and mechanisms forsustainable utilization of bioresourcespose multidimensional challenges. Theseissues have been negotiated extensivelyunder the aegis of the United Nations.Consequently, the international treatiessuch as the Convention on BiologicalDiversity (CBD), 1992; Trade RelatedIntellectual Property Rights (TRIPS)Agreement under World TradeOrganization (WTO), 1995; and theCartagena Biosafety Protocol, 2000have been finalized (see Table 8.3).The Contracting Parties of theseinstruments are actively engaged inevolving mechanisms to effectivelyimplement the provisions containedtherein.

Significantly, these developmentshave also surfaced some contradictorytrends, which need to be closelyexamined in order that we succeed insafeguarding livelihoods of localcommunities dependent on biologicalresources and in ensuring full realizationof potential of new emergingtechnologies for the benefit of cominggenerations. It is being increasingly

Table 8.2: Agreements entered into by ICGEB for Transfers ofTechnology to the Industrial Sector

Product Country Year

HIV 1-2 Diagnostic Kit India 1997Nigeria 1992

Hepatitis C Diagnostic Kit India 1997Sri Lanka 1999India 2001

Hepatitis B Vaccine(option)(under negotiation) India 1998Egypt 1999Sri Lanka 1999Brazil 2002Italy/Iran 2002

Recombinant Insulin Argentina 1998Sri Lanka 1999

EPO - Erythropoietin(option)(option) Italy 1996India 1998Egypt 1999Sri Lanka 1999Venezuela 2001Italy/Iran 2001Brazil 2002

Alpha Interferon 2b India 1998Sri Lanka 1999

Alpha Interferon 2a India 2002

Gamma Interferon India 1998Sri Lanka 1999

HGH - Human Growth Hormone Italy 1996India 1999

G-CSF - Granulocyte Colony Stimulating Factor India 1998Sri Lanka 1999

Vegetable Brassica expressing BT Toxin India 1999

Development of a Malaria Vaccine India 2001

Development of Recombinant RHBV-BAC India 2001

Patent “Plastid transformation” India 2002


Source: RIS.


accepted that the task of reconciliationcannot be discharged by any singlecountry and that regional cooperationand global responsibilities need to beformalized and gives an institutionalmechanism (See Box 8.2).

In Pakistan the Plant VarietyProtection (PVP) Act has been finalizedafter detailed deliberations. Pakistan hasstrengthened the mechanism forapproval of any plant variety forcommercial cultivation. All the varietiesof major crops are now screened andtested for any possible disease, for theirtolerance and their possible implicationsfor environment. The environmentministry has issued the guidelines forcomplying with before PVP protectionis granted. The various ministries arealso working towards the necessarylegislation concerning access to geneticresources required under the Conventionon Biological Diversity (CBD).

Biodiversity in Sri Lanka has beena major policy concern. This countryis one of the 25 biodiversity hotspotsof the world.39 The South Westernregion of Sri Lanka is extremely richwith biodiversity. The Convention onBiological Diversity was signed andratified by Sri Lanka in July 1992 andMarch 1994, respectively. The Ministryresponsible for the subject, the Ministryof Environment and Forest, has the dutyto ensure that the provisions of theConvention are adhered to.

As part of India’s commitment toTRIPs Agreement under WTO Indiaenacted a legislation protecting plantvarieties. In the year 1999Government introduced a Bill to this

effect in Parliament which was laterreferred to a Joint ParliamentaryCommittee (JPC) so as to ensure

protection of farmers’ interests. Aftergetting recommendations from thiscommittee Government enacted thePlant Variety Protection Act (PVPA),2001.

The PVPA attempts to ensure thedelicate balance between the interestsof plant breeders and farmers. Thefarmers now can raise crops of aprotected variety every year from theirsaved seeds. Under this legislation theplant breeders can make profit from thefirst time sale of self-perpetuating plantspecies. The Act has taken care offarmers’ interests by putting a clause

Table 8.3: Status of the Convention on Biological Diversity

Countries CBD Contribution to TrustFund for CBD (in USD)

Signatories Ratification

Bangladesh 05-06-1992 13-05-1994 955Bhutan 11-06-1992 25-08-1995 92India 05-06-1992 18-02-1994 31,534Nepal 12-06-1992 23-11-1993 370Pakistan 05-06-1992 26-07-1994 5,641Sri Lanka 10-06-1992 23-03-1994 1480

Source: RIS.

Box 8.2: Work Agenda for Biodiversity Conservation in South Asia

The Convention of Biological Diversity (CBD) and emergence of TRIPs regime under theWTO has set in a canvass where policy options for developing countries have got squeezed tovery few while challenges have multiplied many times. In this context regional cooperation hasto be seen in a new perspective. Living organisms do not recognize territorial boundaries. As aresult, wild biological diversity, diverse cultivars of crops, land races of domesticated animals,and marine and coastal biological diversity are shared by neighboring countries. They alsoshared the socio-economic contests in which biological diversity is maintained and could bethreatened. In this regard, South Asian countries can evolve a work agenda:

(a) Actions to be taken at regional levels:Appropriate institutional set up at the regional level can only help in streamlining thevarious efforts made for biodiversity conservation and would also help in meeting individualcommitments at international forums. The Technical Committee on Environment andMetrology, which has been considering to give a shape to the SAARC cooperativeprogramme for biodiversity management, and the Technical Committee on Science andTechnology, working to get SAARC Biodiversity Council established, should work inclose cooperation. The SAARC Biotechnology Council may act as a forum for scientistsand policy makers in the region and from other developing countries to discuss issuesrelated to the biotechnology policy in particular and bioresource policy in general.

(b) At regional level efforts should be made to establish a Biodiversity Conservation Fund(BCF). The BCF would be meeting a long felt need of a financial mechanism required forthe conservation and management of biodiversity. The SAARC member countries mayconsider various instruments to tap resources for this fund.

(c) At the regional level, effort should also be made to hold a special meeting of EnvironmentMinisters to draw attention at the apex level on the vital issue of biodiversity conservation.Similar meeting is also required to be organised at the level of senior officials, NGOs,economists and experts from legal profession to continue a meaningful dialogue at theregional level.

Action to be taken at the National level(a) At the level of National Government in each member country, it is important to realize

that biodiversity conservation has to be a multi-disciplinary exercise to enhance involvementof experts from different streams. National Governments should set up inter-disciplinarycommittees at the highest level of advise and guide the conservation programmes.

(b) The law schools and universities may consider to launch diploma courses in the legalaspects of biodiversity conservation. Similar courses should also be made available intechnical aspects of conservation for legal experts. At National Government level effortsshould also be made to recognize and encourage the role being played by women andNGOs in conserving biodiversity.

Source: Based on RIS Occasional Paper no. 59 (2001) A Framework of Cooperation in Conservation ofBiodiversity in South Asia: Profile of Issues and Challenges by Sachin Chaturvedi and K.P.S. Chauhan.



(Article 17), requiring a plant breederto provide an affidavit that the newlybred variety does not contain theterminator gene.40 The Act has a strongprovision for compulsory license toundertake production, distribution andsale of the seed/planting material of aparticular variety, if the same is notavailable on reasonable price or inadequate amount.

8.5 Biosafety Management andRegulatory IssuesIn the recent years almost all the SouthAsian countries have promoted develop-ment and diffusion of biotechnology in amajor way. The inter-linkages betweendifferent sectors have been strengthenedand institutional structures have beendeveloped for commercialization ofvarious biotechnology products.However, there is some apprehensionabout adverse implications ofbiotechnology (See Box 8.3).

In Pakistan in order to overcomethe biosafety concerns, NIBGEproposed a voluntary code of conduct

for the release of GMOs way back in1994. This has now been updated bythe ministry of environment as bio-safety guidelines in consultation with allthe stakeholders, which hopefully willsoon be approved at the appropriateforum. This will provide an impetus toindigenous R&D biotechnologyactivities. A National BiosafetyCommittee was formulated in January2000. Draft proposal on BiosafetyRegulation was prepared and is atapproval stage by the FederalGovernment.

The biosafety debate in South Asiacame under a sharp focus when SriLanka took an extreme step of banningthe imports of GM food completely inMay 2001.41 The Sri Lankan gazettenotification on the ban said it affectsany food or food additives that have beensubjected to genetic modification. Itmentioned “genetically engineered food”means food that contains or wasproduced with a genetically modifiedmaterial. One of the reasons given forthe ban was that Sri Lanka did not have

the expertise to judge whether importedGM foods were good or bad. This gotSri Lankan authorities at the centre ofstorm. The ban was subsequentlysuspended.

In the first option, the Sri Lankanfood control Authority has theresponsibility of looking into the foodsafety aspect of GM foods on behalf ofconsumers. The second option is theban. Although the word “ban” is notused anywhere in the regulationsrestricting the imports of GM foods, byimplication it is a ban. At this point SriLanka is working with the UNEP-Biosafety project to evolve nationalguidelines and strengthening the riskassessment and management systemfor effective biosafety mechanisms. Aspart of the project the database is alsobeen established to put togetherinformation about GMOs and LMOs.Sri Lanka has also signed the BiosafetyProtocol on 24 May 2000 and is all setto establish domestic legal measuresand build capacity in the area of biosafetybefore final ratification comes. TheMinistry of Environment is the NationalFocal Point and is obliged to implementthe articles of the protocol.

In Bangladesh the priority at thispoint is in setting up of a NationalCommittee on Biosafety of Bangladesh(NCBB), as has also been proposed inthe Biosafety guidelines. The committeeis to oversee research on transgenic andhazardous organisms in the researchinstitutes handling such material,monitor release of such organisms intothe environment and also to ensure foodsafety, if such organisms are detectedin food. The committee will alsooversee the import of such organismsinto the country. The NCBB has to beheaded by a full Secretary and amember-secretary on a full time basisas explained in the guidelines.42

In India, the debate on biosafetyguidelines has come a full circle asIndian Ministry of Environment andForest (MOEF) reported sowing ofunapproved genetically modified (GM)cotton seeds in several hundred hectares

Box 8.3: Declaration of the 2nd SAARC Peoples’ Forum(“Mukti-Paani” Declaration)

We, the peoples from South Asia region, where nearly one quarter of the world populationlives, have gathered here in Katmandu from 18 to 21 December 2000 to build solidarity betweenour people in order to collectively defend our (1) Rights to Livelihood and Food Sovereignty, (2)Rights of Movement and Personal Security and (3) Right for Self-determination. We are expressingour commitment to continue our struggle to achieve these goals and we are defending the samerights of all the people of the world whose rights are being systematically violated.

We reject the idea that biotechnology and genetic engineering or any adventurousmanipulation of genes, dictated by corporate profit and greed, can increase food production.Rather than demonstrating any positive promise genetic engineering is ensuring monopolymarket of herbicides, chemicals and other patented products of the companies and increasingrisks for health and biological pollution. Technology driven by the greed of corporate profit iseroding local and indigenous knowledge systems that has been historically proved to be efficient,sustainable, diverse and grounded on the collective community ethics and responsibility. Tostop our communities from disintegration we demand that our science and technology policyis based on our historical knowledge, skill and ethics.

We reject any technology that is against our moral, ethical and cultural values but concentratepower and wealth in multinationals and accelerates economic disparity and social injustice.Adventurous genetic manipulation to control life, nature and economy is not acceptable to us.While our farmers are already producing surplus food and grains rotting in the storehouses it isbizarre and ridiculous to claim that we need biotechnology and genetic engineering for morefood production. There are ample evidences that South Asia produces more food than thepopulation growth rate in the region. With good planning ensuring access of the poor throughefficient distribution policies, our region is absolutely capable to deal with the food andmalnutrition problem. We demand that our governments pay full attention to distributionstrategies based on co-operation and collective action. They should not be fooled by adventurous,unsustainable and risky technologies in order to solve the problem of hunger and malnutrition.



of land. The report has stirred theongoing debate on GM crops in India,as had happened way back in 1997when unapproved GM eggplant waslocated in an agricultural researchinstitute without sufficient safeguards.43

This has once again brought theimplementation-related aspects ofbiosafety protocol at the centre-stageand has raised several issues concerningthe very ability in many developingcountries to handle sensitivetechnologies in such vital sector asagriculture. Though India establishedthe bio safety guidelines way back in1989, till now no commercial trials ofGM crops have been allowed except theone for which permission was grantedin (March 2002). India’s Biosafety and

Recombinant DNA Guidelines (1990)fall under the Environment (Protection)Act of 1986. In 1994, after India signedthe Convention on Biodiversity, the DBTrevised its earlier guidelines toaccommodate the safe handling ofGMOs in research, application andtechnology transfer. This includes thelarge-scale production and deliberaterelease of GM plants, animals andproducts into the environment. Theguidelines are also provided for theshipment and importation of GMOs forlaboratory research.

8.6 An Agenda for RegionalCooperationBiotechnology has emerged as one ofthe important links in the regional

cooperation programme in the Asiancontext. BIMST-EC, Asian CooperationDialogue (ACD) and Indian Ocean RimCooperation are some of the groupingsin which different South Asian countriesare participating and biotechnology hasbeen identified as a priority area forcooperation. In the framework ofSAARC also several activities are beingconducted.

The first meeting of the TechnicalCommittee on Science and Technologyunder the reconstituted SAARC IntegratedProgramme of action identifiedbiotechnology an important area of jointactivity in Delhi 2001.44 The committeeemphasized on the need of building atalent pool available in the SAARCcountries. The meeting also called foracknowledging the availability of a vastreservoir of natural resources in theregion. The Special Session onBiotechnology also reviewed progresson activities undertaken already such asplant tissue culture, medicinal andaromatic Plants, vaccines and diagnosticsfor human health, aquaculture and humanresource development.

However, there are certain areasenlisted below which may be addressedon priority for regional cooperation:

Research Priority for Food andNutritional SecurityIn terms of ensuring nutrit ionalsecurity in the region it is importantthat research plans address issues likeincreasing Vitamin A, iron and othernutrient in the edible portion of variousplants and crops. It is desirable thatSouth Asian countries come together toaddress these constraints andeconomize on selection and applicationof various techniques in biotechnology.Regional cooperation may evenstrengthen national approaches inintegrated nutrient management anddevelopment of biofertilizers andbiopesticides. The post-GreenRevolution progress with soil fertility,environment, biological stresses shouldbe shared to evolve an effectivestrategy towards sustainable agriculture.

Table 8.4: Leading Biotechnology Institutions and Status of Biosafety inSouth Asian Countries

Status of Regulatory System

Country Responsible Protocol Protocol FieldAgency Signed Ratified Testing

India Ministry of Science and Technology √ √ √(Department of Biotechnology)Ministry of Environment and Forests(Genetic Engineering Approval Committee)Centre for Cellular and Molecular BiologyCenter for DNA Fingerprinting & Diagnostics

Pakistan Establishment of Centre of Excellence on √ X √Molecular Biology (CEMB)National Institute for Biotechnology andGenetic Engineering (NIBGE)Centre of Chemistry and Biotechnology,Agricultural BiotechnologyInstitute of Biochemistry and Biotechnology

Sri Lanka National Science and Technology √ X √Commission (NASTEC)National Genetic CommissionNational Assisted ReproductiveTechnologies CommissionNational Science andTechnology Testing CommissionPlant Genetic Resource Centre

Nepal National Agriculture Research Council √ X X(NARC)Royal Nepal Academy of Scienceand Technology (RONAST)Biotechnology Development CouncilBiotechnology Coordination Committee

Bhutan National Biodiversity Center √ √ XNational Environment CommissionRenewable Natural Resources Centres

Source: RIS.



Harmonization of BiosafetyRegulationsIn the region Biosafety Protocol has yetto be ratified by some of the membercountries. This puts South Asia on anuneven ground in terms ofimplementation of a regulatory regimefor governance of biotechnology in theregion. The biosafety and protocolsfrom all member states except two wereexchanged. Follow up action is beingtaken by respective member states. Itmay be agreed that all countries wouldexchange their existing biosafetyprocedures and protocols. Dependingon the outcome of the ongoing WTOdiscussion on labelling and segregationof GMOs, it is important that regionalapproach is developed in this importantarea. In this regard, international supportby various agencies should be exploredso as to overcome the scientificuncertainity and methods fortraceability.

Lesson should be learnt from OECDcountries where debate on monitoringof GMOs after release into the naturalenvironment has further intensified.Some scientist argued that monitoringshould be continued so that moreinsights are available for riskmanagement while others feel that thehigh cost of monitoring are not justifiedwhen transgenics have successfullypassed the hurdles of safety assessmentand risk management.

Cooperation in Human ResourceDevelopmentIt is important to realize that some ofthe South Asian countries are facingconstraints on the front of trainedmanpower in the first generationbiotechnology. At present, there are notenough capable scientists withadequate exposure to advances inbiotechnology. Agriculture andforestry are key sectors where evenpreliminary biotechnology can help ina major way. Some other members likeIndia and Sri Lank are moving towardsthe new biotechnologies from the firstgeneration biotechnology. Thus, these

complementarities should be tapped forexpanding the regional technologicalfrontier. In this regard the financialsupport from SAARC-Japan SpecialFund may be tapped to strengthen themanpower skill up gradation programme.Human resource development is alsoimportant for facilitating technologytransfer and adaptation when it comesto international collaboration.

Data Bases and NetworkingThe South Asian countries may alsoconsider the pooling of resources forensuring online search for scientificliterature through internet and helpscientific institutions overcome the highcosts of purchase of scientific journals.

Some countries are gainingexperience in field testing, while othershave not yet completed biosafetyguidelines. Information on socio-economic and scientific development inbiotechnology and biosafety can beaccessed from a number of informationsources, including the BiosafetyClearing House mechanism to beprovided under the terms of theCartegena Biosafety Protocol.

Joint Research in Other Key AreasIt is important to link up various researchproject funded at the bilateral andmultilateral level to converge so as toyield regional gains. There are somemajor challenges which modernbiotechnology may help in overcomingtogether with traditional plantimprovement methods in makingavailable better agro economicpractices. In many parts of South Asiasalinity and drought resistance are someof the issues which have to beaddressed on priority.

Activate Joint Forum for PrivateSectorDevelopments in biotechnology arelargely driven by multilateralcooperation the world over. It isimportant that small national companiesget regional support in terms of accessto technology and resources. In this

regard, firms working in the area ofbiotechnology in South Asian regionshould become more active at a jointforum to provide their inputs forpolicy formulation and for workingtoward joint stands in internationalnegotiations.

Regional BiodiversityConservation Fund (RBCF)At the regional level efforts should bemade to establish a Regional BiodiversityConservation Fund (RBCF). The RBCFwould be meeting a long felt need of afinancial mechanism required for theconservation and management ofbiodiversity. The SAARC membercountries may consider variousinstruments to tap resources for thisfund. The fund may be used forsupporting collective initiative such asinventorising the germplasm collectedfor SAARC gene bank for setting up ofcrisis management group for any kindof biohazard; and collective monitoringof biosafety protocol for checkingtransboundry movement of geneticallymodified organism.

Endnotes1 Choudhury and Islam, 2003.2 Declaration at the Third International Plant

Tissue Culture and BiotechnologyConference.

3 Seraj, 2001.4 www.iaea.or.at/worldatom/Press/5 Dukpa and Yaganagi, 2002.6 Kumar, 1988.7 India, Sixth Five Year Plan, 1980-85, New

Delhi, Planning Commission, p. 326.8 DBT, Annual Report 1987-88.9 DBT, Annual Report, various years.10 DBT, Annual Report 2000-01.11 www.ibab.ac.in12 The Hindustan Times, December 8, 200113 Indian Express, January 9,200214 Chaturvedi, 2002.15 The Economic Times, July 29th 2001.16 Prakash, 1997.17 The Kathmandu Post. July 16, 2002.18 Agarwal, 2003.19 Newsletter of Royal Nepal Academy of

Science and Technology, Kathmandu, Nepal,December 2000.



20 Rajbhandary and Ranjit, 2001.21 Ibid.22 Tuladhar, 1994; Yami, 1997, Rajbhandari

and Ranjit, 2001.23 h t t p : / / w w w. m o s t . g o v. p k / f r a m e s /

press_releases/PressReleases/24 Yusuf Zafar, 2001.25 Kauser, 2001.26 Ijaz Ahmad Rao, 20thNovember,

Pakistan.com27 http://www.nibge.org/nibgeover.htm28 Farid, 2002.29 The News. October 13, 2002.30 Pakistan Link. October 15, 2003.31 Dawn. November 5, 2002.32 ArabicNews.Com October 25, 2001.33 NASTEC, 2003.34 Perera, 2001.35 ibid.36 http://www.nsf.ac.lk/sida/pest.htm37 Embassy of Sri Lanka, Washington DC

November 06, 200338 [email protected] Perera and Rajapakse, 2003.40 Mehra, 2000.41 Arulnandhy, 2003.42 Recommendations adopted at the Fourth

International Plant Tissue CultureConference, 2001, Dhaka.

43 Biotechnology and Development Monitor,No. 30.

44 SAARC News. January 2001.

ReferencesAgarwal, Viswanath P. 2003. Biotechnology

and Poverty Alleviation in DevelopingCountries: A Case Study of Nepal.Agricultural Biotechnology andBiochemistry. (Rlabb), Kathmandu.

Arulnandhy V. 2003. Biotechnology and theDilemma. The Island. 20th June.

Bhutan Royal Government. 2001. Countrypresentation by The RoyalGovernment of Bhutan at Third UnitedNations Conference on the LeastDeveloped Countries.

Chaturvedi, Sachin. 2002. “Collection ofBiotechnology Statistics and Status ofBiotechnology in India: An AnalyticalOverview”. Paper presented to the 3rd

Ad Hoc NESTI Meeting onBiotechnology Statistics, Finland.

Chaturvedi Sachin and K.P.S. Chauhan. 2000.“Legal Frame Work of Cooperation inConservation of Biodiversity in SouthAsia: An Indian Perspective”. Dhaka,Bangladesh.

Choudhury, Naiyyum and M. Serajul Islam.2003. “Biotechnology in Bangladesh”in Chaturvedi, Sachin and S.R. Rao(eds). Biotechnology and Development:Challenges and Opportunities for AsianRegion. New Delhi: AcademicFoundation.

Department of Biotechnology. Annual Report.Various years.

Dupka, Kumbu and Yaganagi, Medon. 2002.“Bhutan: Risk assessment andManagement”. Paper submitted at AsiaRegional Workshop on RiskAssessment and Risk Management toImplement the Cartagena Protocol, inNew Del India, 22-24 May.

Farid Tariq. 2002. Biotechnology: Need to dothe needful. The Nation. 28th January.

Kumar, Nagesh. 1988. Biotechnology in India,Development (Special issue onBiotechnology), March.

Malik Kauser A. 2001. In Defense ofBiotechnology. The Dawn. February26.

Mehra, K. L. 2000. Plant Varieties Bill DoesSafeguard Farmers’ Rights. TheEconomic Times. December 16.

NASTEC. 2003. New Genetics and AssistedReproductive Technologies in SriLanka: A draft National Policy onBiomedical Ethics. National Science andTechnology Commission.

Perera A.L.T. 2001. Priorities for AgriculturalResearch in Biotechnology - the Caseof Sri Lanka, International Service forNational Agricultural Research(ISNAR), The Netherlands.


Perera A.L.T. 2003. Sri Lanka: RiskAssessment and Management. SriLanka: IUCN.

Panta, Bikram Data and Mukti Ram Aryal.2000. Biotechnology: NeglectedDiscipline in Nepal. Kathmandu Post.February 18

Prakash, Jitendra. 1997. The Concept ofBiovillage in Proceedings of RegionalTraining-cum-Workshop onApplication of Biotechnologies toRainfed Farming System, includingBioindexing, emphasizing participatoryapproach at community level, M. S.Swaminathan Research Foundation,Chennai

Rajbhandary, B. Saman and Mukunda Ranjit,2001. Status Report on BiotechnologyDevelopment in Nepal. Ministry ofScience and Technology. Nepal. June.

RONAST. 2000. Newsletter of Royal NepalAcademy of Science and Technology,Kathmandu, Nepal, December.

Seraj, Zeba I. 2001. The Exciting Future ofBiotechnology. The Daily Star. January30.

Sri Lanka. 2003. Key technology and economicdevelopment MOUs signed duringvisit. Embassy of Sri Lanka in theUnited States of America WashingtonDC

Tuladhar, S.M. 1994. Biotechnology Policyformulation for Nepal, NCST,Kathmandu, Nepal.

UNDP. 2002. “Bhutan Develops a NationalBiodiversity Conservation Strategy”.October.

Yusuf Zafar. 2001. Pakistan in AgriculturalBiotechnology Poverty Reduction, andFood Security. Manila: ADB.

Yami, K.D. 1997. Potential and Problems ofbiotechnology in Nepal. Proceeding.National. Workshop on promotion ofnew technologies in Nepal. RONASTand Univ. Skatclyde, UK.


9.1 Introduction

This Chapter seeks to address thefollowing broad issue: Has the

policy reforms at the national level andglobal economic changes been leadingto improvement in the quality of lifeof the people? In seeking an answerto this question the present Chaptertries to make a brief assessment ofthe human development profile of theSouth Asian countries and highlightssome of the challenges being facedby the region. In this context, theissue of the relationship betweengrowth strategy and povertyeradication has been touched upon.There is considerable awarenessabout the national level efforts in theSouth Asian countries to combatpoverty and achieve overall humandevelopment. Relatively less knownarea of regional efforts under theaegis of SAARC for poverty alleviationin the region has also been highlightedbriefly in this Chapter. Finally, theChapter emphasizes need for sharingof successful developmentalexperiences amongst the countries ofthe region.

Development with aHuman Face9


9.2. Human DevelopmentProfileCountries of the SAARC have madeprogress in various aspects of humandevelopment precisely because in thisregion ‘growth with equity’ alwaysremained the focus of developmentstrategies.1 However, the progress madeso far has varied from country-to-country. Even now around 41 per centof population is below the incomepoverty line defined as US $ 1 per day(1993 PPP US $) in the region. It rangesfrom 44 per cent in India to 6.6 per centin Sri Lanka (Table 9.1). However,going by the national poverty lineestimates, there is evidence to suggestthat the incidence of poverty has beendeclining. For example in India theproportion of population belowpoverty line has declined from nearby36 per cent in 1993-94 to 26 per cent in1999-00.

In terms of health services around22 per cent of total population is withoutaccess to health services. While the bestpicture is one of Sri Lanka with only 7per cent population is excluded fromhealth services the other extreme is 55per cent in the case of Bangladesh.

One of the most basic needs ofhuman existence remains unfulfilled inthe region as 11 per cent (151 million)of the total population remains withoutaccess to safe drinking water. WhileBangladesh has made significantachievements on this dimension withonly 3 per cent population not havingaccess to safe water, in the case ofBhutan it is around 38 per cent. Littleprogress in access to sanitation has beenmade with 63 per cent of totalpopulation in South Asia remainingwithout access to sanitation. If SriLanka has been successful in tacklingthis problem wherein only 17 per centof its population is without access tosanitation, in the case of Nepal the figureis 73 per cent.

One of the important indicators ofhuman development is improvementin education. As is evident from Table9.1 around half of the total adultpopulation in South Asia remainsilliterate. Except Maldives where only3.3 per cent of total adult populationis illiterate and in the case of Sri Lankawhere this figure is 8.4 per cent, allother SAARC countries confront adaunting task on this dimension. In


terms of female illiteracy too, mostof the countries have a challengingtask ahead. Challenges of humandevelopment are also manifested in thedimensions of child malnutrition,under-5 mortality rate, as well asspread of life-threatening diseases likeAIDS.

Summing up, it may be stated thatwhile progress has been made onvarious dimensions of humandevelopment in the South Asianregion,2 the present status of humandeprivation in the South Asiancountries poses considerablechallenges for the developmentstrategies that these countries adoptin the times to come as brought outabove. In this context, it may behighlighted that the efficacy of agrowth strategy has to be assessed interms of its developmental implications.An important way of doing so, amongothers, is by analyzing the povertyelasticity of growth in a dynamic setting,which is taken up below.

9.3. Poverty Elasticity ofGrowthIdeally, faster economic growth mustreduce poverty. The relationshipbetween growth and poverty hasremained a debatable issue due tovarious complexities. In addition,another problem is that the extent towhich growth translates itself intopoverty reduction varies considerablyfrom one country to another. Somebroad implications of a growthstrategy manifesting itself into povertyalleviation could be captured by thepoverty elasticity of growth. This isdefined as the number of percentagepoints of change in poverty observedfor every one per cent rise in real percapita income. A negative figure ofsuch an elasticity implies povertyreduction. As evident from Table 9.2during the 1990s the greatestelasticities were for the Philippinesand Malaysia (-1.7 to –2.0), followedby Bangladesh, the Lao People’sDemocratic Republic, India and

Vietnam (-0.8 to –1.0), with muchlower figures registered in China andThailand (-0.6). While Bangladesh andIndia have been able to convert theirgrowth process into a developmentprocess at least on the dimension ofpoverty alleviation, an opposite effecthas been observed in the case ofPakistan.

Extending the analysis further itis also possible to capture the growth-poverty relationship by normalizingfor the inequality or the distributiveaspects. It is yet another way ofanalyzing the effectiveness of policiesin translating growth into povertyreduction by asking the question asto what the elasticity would have beenhad income inequality been heldconstant. This is known as thedistribution-neutral growth elasticityand by definition it is always negativesince under these circumstancespositive growth will raise the incomeof everyone, including the poor, andthus reduce poverty.

Table 9.1: Human Development ProfileIndia Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives South Asia Developing

(weighted Countriesaverage)

Population below income poverty line (%)- $1 a day (1993 PPP US$) 1983-2000* 44.2 31 29.1 37.7 6.6 - - 41 -- national poverty line 1987-2000* 26.1 34 35.6 42 25 - - - -

Population without access to health service 1995- number (millions) 143 63 68 - 1.3a 0.6 0.1b 276T 910T- as a % of total population 15 45 55 - 7c 35 25d 22 20

Population without access to safe water 2000- number (millions) 122 17 4 5 3 0.8 - 151T -- as a % of total population 12 12 3 19 17 38 - 11 22

Population without access to sanitation 2000- number (millions) 700 54 61 18 3.2 0.7 0.13 835T 2439T- as a % of total population 69 39 47 73 17 31 44 63 48

Illiterate adults 2000- number (millions) 434 78 76 14 1.6 - 0.01 604T -- as a % of total adult population 42.8 56.8 58.7 58.2 8.4 - 3.3 45.5 26.3

Illiterate female adults 2000- number (millions) 270 48 44 9 1 - - 372T -- as a % of total adult female population 55 72 70 76 11 - - 58 31

Children malnutrition (weight for age) 2000- % of children under 5 47 38 61 47 33 - - 47 -

Under 5 mortality rate (per 1000 live births) 2000 96 110 82 100 19 100 80 95 59

People living with HIV/AIDS Adult (% age 1-49) 2001** 0.79 0.11 <0.1 0.49 <0.1 <0.1 0.06 - 1.32

Notes: Row 1: UNDP 2002; Row 2: UNDP 1998; Rows 3,5,8,9: UNDP 2002; Row 4,5: UNDP 2002, MHHDC 2001; Rows 6,7: World Bank 2002a.A,c: year 1985-95; b,d: year 1991, *: data refer to the most recent year available during the period specified; **: data refer to the end of 2001.

Source: RIS based on Human Development in South Asia 2002: Agriculture and Rural Development, Mahbub ul Haq Human Development Centre, Oxford.India, Ministry of Finance, Economic Survey, 2001-02.

Development with a Human Face


During early 1990s, the distribu-tion-neutral growth elasticities wereoften very different for the South Asiancountries as well as across othercountries. In the case of Sri Lanka(-3.8) it has been the highest while inthe case of Pakistan (-1.6) it has beenthe lowest with Bangladesh (-2.3) andIndia (-1.8) falling in between. Thisneeds to be interpreted as the result of‘varying social and economicconditions, as reflected in the initialincome level and initial income inequalityprevailing in these countries: the lowerthe initial level of income and the higherthe initial degree of inequality, the harderit will be for growth to lift people out ofpoverty’.3

9.4. UN MillenniumDevelopment GoalsOne of the major initiatives for bringingabout development among thedeveloping countries is setting up ofthe UN Millennium DevelopmentGoals. As it is evident from Chart 9.1the track record of the South Asianregion in terms of poverty alleviationhas not been very encouraging. Thisuneven progress would have a bearingon the achievement of the UNMillennium Development Goals aswell. For instance, South Asia appearsto be missing out on the millenniumgoal with respect to ‘eradicating

extreme poverty and hunger ’ by2015.

This poses considerable challengesto the policy makers in the region and itis also consistent with the analysispresented in the preceding sections.However, there has been a number ofinitiatives undertaken by the policymakers in the South Asian region toaddress this issue both at the nationaland regional level.

In the following section, wehighlight some of the efforts that havebeen made in recent times to addressvarious poverty and development related

issues, especially human developmentunder the aegis of the SAARC.

9.5. Regional Efforts underSAARC for PovertyAlleviationThere are two important regional-levelSAARC initiatives for povertyalleviation that need to be mentioned.The Report of the Independent SouthAsian Commission on PovertyAlleviation (ISACPA) will be presentedat the 12th SAARC Summit in earlyJanuary 2004 in Islamabad, Pakistan.The 11th Kathmandu summit had alsodirected the Council of Ministers toreview, on a continuous basis, theRegional Poverty Profile to beprepared under the SAARC Secretary-General with the support of relatedUN agencies and other institutions.The SAARC Regional Poverty Profile2003 has already been published andit brings out important lessons fromthe regional poverty situation (Box9.1). Work on the second issue of theSAARC Regional Poverty Profile 2004has already been launched. However,in order to meet the challenges ofdevelopment more concerted effort isrequired in the South Asian region.This calls for devising pro-poorgrowth and development policies that

Table 9.2: Poverty elasticity of growth in the 1990s, selected countries

Total Poverty Distribution-neutral growthelasticity, 1990s elasticity, early 1990s

East and North-East AsiaChina -0.6 -2.2Republic of Korea 1.5 -5.4

South-East AsiaIndonesia 3.4 -2.4Malaysia -2.0 -1.9Philippines -1.7 -1.8Thailand -0.6 -1.9Vietnam -1.0 ..

South AsiaBangladesh -0.8 -2.3India -0.9 -1.8Pakistan 3.6 -1.6Sri Lanka .. -3.8

Source: RIS based on UN (2003), Promoting the Millennium Development Goals in Asia and the Pacific:Meeting the Challenges of Poverty Reduction, ESCAP.

Chart 9.1: Global poverty rates down 20% since 1990,but progress is uneven

Source: http://www.developmentgoals.org/Poverty.htm



are more effective. This perhaps ispossible with the help ofunderstanding some of the implicationsof the globalization and the economicreforms process in the region anddevising social safety nets to achievethe objective of human security andhuman governance.

9.6. Challenges for HumanDevelopmentEducationEducation, which is an investment inhuman resource development, increasesemployment opportunities, improvesproductivity and thereby increases

formidable because of earlier neglect.Approximately 2.2 million children areadded each year to the existing numberof 50 million. This results in a highpupil-teacher ratio in the region.Moreover, the poor quality of schooling,unqualified teachers, irrelevantcurriculum, lack of textbooks and otherlearning materials are chronic in SouthAsia. Above all, the problem of schooldropouts reflects the quality ofeducation. However, all the South Asiancountries have adopted measures tostrive for universal education, butprogress within the region remainsvaried.

Another concern relating to humandevelopment is the persisting gapbetween enrolment rates of males andfemales at all levels, which is particularlywide at the tertiary level. Among theSouth Asian countries, The Maldivesand Sri Lanka have the narrowest gapbetween educational attainment of malesand females at the primary as well assecondary level. On the other handBangladesh, India and Nepal have a verywide gap at the secondary level. Itseems that despite the widespreaduniversal primary educationprogrammes initiated by the entire SouthAsian member countries there are widegaps in enrolment ratios between malesand females. During 1995-99, at theprimary level, gross enrolment of girlsis only 81 per cent compared to 99 percent for boys. During the same period,South Asia’s female adult literacy ratesreached 43 per cent from 24 per centin 1980. Despite remaining the mostilliterate region in the world, South Asiahas achieved universal primaryeducation for all.

It has been further estimated thatout of the total illiterate population inthe South Asian region, 63 per cent arewomen – nearly two fifths of girls,enrolled in primary school drop outbefore grade V. As a result, the netprimary school attendance is muchlower for girls than boys in South Asiaduring 1990s. Further, this is muchlower in South Asia as compared to the


Box 9.1: Poverty Issues in the SAARC: Some Lessons

The synthesis reports from different country teams indicated several similarities (bothpositive and negative) among SAARC countries. Speaking of positive changes, during the last2-3 decades, almost all countries have made visible progress in reducing population growthrates, raising GNP and per capita incomes, social sector facilities etc.

However, despite positive trends at aggregate level, the economic and non-economicinequalities between different groups are also visible. In all the countries share of secondaryand tertiary sectors in GNP is slowly rising, while the contribution of agriculture (as a primarysector) is declining. Some of the major problems include: widespread poverty (seen throughdifferent economic and social angles), low human development index, persistence of “povertyfundamentals” (institutional inequities, rigidities, distorted incentive structures, etc. promotingpoverty) and the exclusion of the poor particularly women, low caste people, unorganizedsector, landless and casual labour, slum dwellers, etc. persists. This constitutes one of themajor challenges before SAARC countries.

By looking at “diversities” of poverty situation in terms of who the poor are, where theylive, and why they continue to be poor, the report calls for a disaggregated view of the poor anddifferentiated poverty reduction interventions. The disaggregated picture of poverty and aframework to understand the same has been dealt with.

The report also sketches a framework to revisit the past development strategies and triesto indicate how poverty reduction failed to get sharp and exclusive focus in the past. Thedominant features of past efforts in terms of (i) centralized, top-down and supply-driven(charity dominated) approach, (ii) persistent macro- micro disconnects, (iii) disregard of“poverty fundamental” as key obstacles; (iv) low priority to institutional dimensions; (v)disregard of perspectives and potential of the poor due to top-down approach, etc. werelargely responsible for their mixed success.

The report looks at the gradual shifts in development policies and approaches, which haveled to the current situation where both poverty issues and anti-poverty measures are beinglooked at differently. At present poor are slowly recognized as partners in fighting poverty byway of enhancing their capacities, promoting social mobilization, participation anddecentralization as well as bottom up approaches. The donor-NGO-government partnershipis a key driver of this change.

While narrating positive achievements of past strategies the report puts together selectedsuccess stories to validate the new changes in strategies to address poverty. These successstories deal with different aspects of poverty reduction strategies. The report pleads forrecording more success stories or best practices and understand their driving circumstance inorder to help replicate such successes. One feature of such successes is increased role of NGOsand communities in fighting poverty and deprivations faced by the poor.

Source: SAARC Secretariat (2003).

national income. Another advantage ofeducation is that educated women tendto have lower fertility. Furthereducational indicators especially that offemales, are found to be positivelyrelated to life expectancy at birth. Givensuch important linkages betweeneducation and other basic needs andeconomic indicators, the provision ofeducational services to the masseswould have to be viewed within theframework of human resourcedevelopment for the overalldevelopment.

The challenges in the sphere ofeducation in South Asia have become


world average. As regards the meanyears of schooling, India, Nepal,Bangladesh, Pakistan and Bhutan haveonly 1.2 years of schooling as comparedto 6.3 and 3.9 years in Sri Lanka andMaldives. However, only Sri Lanka hasmet the minimum target of universalprimary education, although India andBangladesh have made considerableprogress in bringing school enrolmentsfor girls nearly in line with boys. Oneencouraging development, is theadoption by the Indian Parliament inAutum 2001, of a legislation whichprovides the right to education forchildren aged 6-15. Sri Lanka hasundertaken a major reform of theeducational system to respond to theemerging needs (Box 9.2).

Reforms and Social SectorsWith the exception of Maldives, socialsector expenditures in South Asiaremain low at less than 5 per cent ofGDP. This contrasts the patterns ofpublic expenditure in these sectors inthe world, which are substantially highat around 5 per cent of GDP/GNP. Apartfrom The Maldives, Bhutan alsoaccords high priority to publicexpenditure in these sectors. Eventhough Sri Lanka has made considerableadvances in these sectors, publicexpenditure in health and educationcontinue to remain low as a proportionof national income during the 1990s.For India, public expenditure oneducation as a proportion of GNP isequal to the South Asian average of 3.2per cent (Table 9.3).

Though public expenditure in thehealth and education sector in India hasincreased, the increase has not beenproportionate during the 1990s. In fact,as a proportion of GNP, publicexpenditure on education declined from3.9 to 3.2 per cent in the post-structuralreforms period in India. The challengefor the reforms programme is to strikea balance between a critical fiscalsituation and social sector development,which impinge critically on the long-term sustainability of growth.


Box 9.2: Educational Reforms in Sri Lanka

Sri Lanka has undertaken a major reform of educational system since 1998-99, encompassingall areas of primary, secondary and tertiary education with the broad objective of enhancinglearning achievements at all levels, in line with the needs of a market driven economy. Thiswould ensure versatility and adaptability, confidence to face challenges, a positive work ethic,leadership and team work and most importantly, communication skills in the present daylabour market. The educational reforms that are being implemented are expected to addressthese issues. The total government expenditure on education in 2000 increased by 6 per centover the previous year. The total expenditure in relation to GDP was 2.5 per cent in comparisonto 2.6 per cent in 1999.

There are pirivena, private and international schools in addition to government schoolsin Sri Lanka. But, in government schools, the average student/teacher ratio has remainedunchanged. The general education reforms, introduced at grade 1 in 1999, were extended tograde 2 in 2000 and will be gradually extended to grade 5 by 2003, when it is likely to becompleted. The reforms were simultaneously introduced to grade 6, 9 and 12 during 1999.These general educational reforms envisage not only changes in classroom teaching, but alsoreforms in a variety of such other related activities as strengthening the teaching of English,developing of technical and practical skills of students, co-curricular activities, special educationfor handicapped students, counselling and career guidance, school based management andteacher education. Along with the educational reforms, several programmes were introduced toimprove infrastructure and support services such as rehabilitation of classrooms, introductionof computers in schools, construction of new school buildings among others. Improvementswere also envisaged for non-school going children between the ages of 5-14 years. Along withthis, the teacher education service was also strengthened.

With regard to university education, the reform process was relatively slow. In 2000, therewere 13 national universities, including the Open University of Sri Lanka. Total admission touniversities other than open university is low when compared to the total number of studentswho acquired the minimum eligibility requirements for university entrance. The student/teacherratio at universities further improved to 12.6 in 2000. A large unmet demand for highereducation continues to exist. In an effort to address these issues, a new tertiary educationstrategy was planned during 2000. The University Grants Commission (UGC) recognizedtwo institutions, viz. the Sri Lankan Institute of Information Technology (SLIIT) and the navaland Maritime Academy (NMA) as degree awarding institutions, under the Universities Act.The Institute of Technology at the University of Moratuwa was also established in 2000.

Several initial steps were taken to implement university education reforms in 2000. Themajor components of the university education reforms are curriculum reforms, establishmentof career guidance services, staff development, preparation of a new Universities Act,accreditation and quality assurance. The UGC conducted several awareness programmes amonguniversity authorities regarding curriculum reforms in 2000. Several universities have commencedcareer guidance units in consultation with the Ceylon Chamber of Commerce. Most universitieshave established staff development units to provide orientation programmes to new recruits tothe academic staff. However, there has been slow progress in university education reformsduring the past three years owing to a shortage of financial resources, lack of enforcementefforts and the absence of a time frame for implementation. In view of the large demand forhigher education, the possibility of seeking private sector assistance in conducting highereducation programmes to lessen the burden on the government has been widely discussed. Ithas been said that the private sector is in a better position to design and conduct courses thatare in greater demand in the labour market. For this purpose, the establishment of an accreditationand quality assurance institution is a prerequisite. The proposed Universities Act is likely tohave provisions for the establishment of such an institution.

Meanwhile, the technical education and vocational training sector expanded further, in linewith the recommendations made by the Presidential Task Force on Tertiary Education andVocational Training. With the rising importance of Information Technology (IT) in the educationalsystem, the private sector has taken the leadership in training IT personnel. In the state sector,the University of Moratuwa, Institute of Computer Technology (ICT) of the University ofColombo and the National Institute of Business Management are the main institutions providingIT education.

The Technical Education and Vocational Training (TEVT) sector expanded in line with therecommendations of the Presidential Task Force (PTF). The TEVT sector consists of technical

Box 9.1 continued


affecting employment levelsadversely. The unemploymentsituation gets aggravated especiallywhen FDI crowds out localinvestment. FDI inflows could affectemployment and labour in the hostcountries in a number of other waysas well. These include their possibletendency to adopt more capitalintensive technique of production thantheir local enterprises, and low verticalinter-firm linkages generated byforeign affiliates. FDI could also haveindirect effects on employment andlabour through relative scales ofoperation, trends in theirrestructuring, their competitiveeffects on local industry amongothers. These together bring to thefore the imperatives of creatingadequate social safety nets so as tofacilitate inter-sectoral mobility ofworkers and their adequate training.5

It has been argued that given theprevalence of widespread poverty anddeprivation in South Asian countriesthere is a need to adopt a widerconcept of social security that wouldinclude both promotional andprotective social security. Acharacteristic feature of current socialsecurity programmes in South Asianeconomies is that they are designed in aconceptual vacuum and areimplemented mainly as welfaremeasures. The emphasis is onpromotional measures and even withinthat category, on poverty alleviationprogrammes. A balanced provision ofpromotional and protective socialsecurity measures is not much evidentin any country. ‘Some estimates of theresource requirements for providingsuch balanced social security suggestthat the cumulative cost of essentialhuman investment over the period 1995-2010 would be over 4-5 per cent ofGDP. Such allocation of resourcestowards the wider connotation of socialsecurity is essential for the South Asiancountries to reap the benefits of thelinkages between social attainmentsand economic growth.’6

Global Competition and SocialSafety NetsA lot of discussion has taken place inrecent times on the issue of pro-poorgrowth. Analysts have tried to definethis concept as comprehensively aspossible (Box 9.3). However, suchconcepts need to be studied in the lightof certain implications of increasingglobal competition for social securityand human governance.

One of the consequence ofincreased competition is unemploy-ment which contributes directly tohuman deprivation profiles. It hasimportant implications for the povertyand inequality profiles of differentcountries in the region. One of thereasons of such a phenomenon in theSouth Asian region is the increased useof capital and technology intensive


methods of production to meetcompetitive standards at the globallevel as well as within a domesticeconomy.4 Rigidities in the labourmarket coupled with limited skill upgradation and barriers to labourmobility also play their role.

Access to foreign financialresources in the form of FDI inflowsis an advantage of global integration.However, the influence of FDIinflows on labour market needs to beassessed in terms of its ultimate effecton the pattern of generatedemployment. The effect of FDI on theoverall employment situation in acountry would depend on the kind ofproduction technique foreignenterprises adopt. There is apossibility that FDI inflows movetowards less labour intensive sectors

Box 9.1 continued

Table 9.3: Public Expenditure on Education and Health

Countries Public Expenditure on Education Public Expenditure on Health(as % of GNP) (as % of GDP)

1990 1995-97a 1990 1996-98a

Bangladesh 1.5b 2.2b 0.8 1.6Bhutan - 4.1 2.1 3.2India 3.9 3.2 0.2 0.6Maldives 6.3 6.4 4.9 5.1Nepal 2.0 3.2 0.8 1.3Pakistan 2.7 2.7 0.8 0.8Sri Lanka 2.7 3.4 1.7 1.4South Asia 3.7 3.2 0.7 0.9World 4.9 4.8 4.7 5.6

Notes: a Data refer to the most recent year available during the period specified in the column heading b Data refer to expenditures by Ministry of Education only.Source: RIS based on UNDP, 2000.

colleges, other public and private training organizations and training institutions managed byNGOs. The target group for TEVT includes unemployed youth, rural women, school leaversand other disadvantaged and low-income groups. The on going TEVT reforms concentrate onmajor areas such as the role of the government, the involvement of the private sector in TEVT,the linkage between general education, university education and TEVT, and training for self-employment and unorganized sector. The Tertiary and Vocational Education Commission(TVEC), the apex policy setting and regulatory body in the TEVT sector, took a number ofmeasures for the systematic development of the sector. While the Department of TechnicalEducation and Training (DTET) admitted large number of students in technical colleges, theSri Lanka Institute of Advanced Technical Education (SLIATE) conducted higher nationaldiploma courses in engineering, accountancy, commerce and business studies. The VocationalTraining Authority of Sri Lanka (VTA) is entrusted with vocational training in rural areas, anddistrict centres in various parts of the country.

Source: RIS based on Central Bank of Sri Lanka, 2000.


Sharing of Experiences withinSouth AsiaOne of the ways in which the SouthAsian countries could cooperate forhuman development through povertyreduction, income generation,employment augmentation andinequality reduction is by sharing thesuccessful experiences. Learninglessons from each other for growth anddevelopment could be one importantdimension of intra-SAARC regionalcooperation for achieving the objectiveof development with a human face.

An example of IT as an enablingtechnology to help the rural poor in thearea of rural telecom is evident inBangladesh (Box 9.4). It might not bewell known that how a company namedGrameen Phone in collaboration with theGrameen Bank has pioneered a newmodel for rural telephones based onshared access-one phone per village-operated by a local entrepreneur. Thepopularity of mobile phones through thisventure has resulted in substitution oftravelling to cities and reduced the costof communicating with peopletremendously along with providing theease at which people can do their dailybusinesses in the rural areas.

In the case of Bhutan one of thesuccess stories is in the area ofhorticulture development with theassistance of the UNDP. An effectiveimplementation of an IntegratedHorticulture Development Programmehas made some significant progressparticularly under the aromatics andmedicinal plants component and that toomost significantly with the development

of essential oils industry fromlemongrass (Box 9.5). In terms of itsimpact for some poor Bhutanesefarmers in the east, the development oflemongrass oil industry has played asignificant role in improving theirlivelihoods through low level ofinvestment and comparatively highreturns resulting in income generation,employment, better housing andaffordability of education.

Substitution of traditional fishingmethods by mechanized fishing boatsin Maldives with the help of UNDP hasbeen yet another successful example ofhuman development at large fromwhich other South Asian countries,where marine sector is prominent, canlearn. Such a project has helped the ruralfisherfolk double their fish catchresulting in increased incomes, greatertrade and reduced poverty (Box 9.6).

It is worth highlighting how aprocess of social transformation startedtaking place when the VillageDevelopment Programme (VDP) gotintensified in Nepal. This has resultedin building a sustainable institutionalfoundation towards poverty alleviationinitiatives at the grassroots. Theprogramme is based on a participatoryapproach and focuses on sustainable

Box 9.3: What is Pro-poor Growth?

Pro-poor growth has been defined variously. Some refer to it as growth that results insignificant poverty reduction, thereby benefiting the poor and improving their access toopportunities. But it is not clear how significant a reduction in poverty must be and howprogress in achieving pro-poor growth is to be monitored. Others equate pro-poor growthwith high elasticity of poverty with respect to growth, this still begs the questions of measuringand monitoring. The concept of “mean growth rate of the poor” has also been introduced,which seems analytically ambiguous.

Pro-poor growth is the type of growth that enables the poor to actively participate ineconomic activity and benefit proportionally more than the non-poor from overall incomeincrease. This signals a clear departure from the trickle-down development notion of the 1950sand 1960s that meant a gradual top-down flow from the rich to the poor. Similarly, it has beenstated, “pro-poor growth to mean that the poor benefit disproportionately from economicgrowth.”

Key to the definition of pro-poor growth is the joint consideration of growth and itsdistribution. It should be stressed that, while both ex ante and ex post distribution are pivotalto poverty reduction, as such pro-poor growth is essentially about ex post distribution, i.e.,distribution of the increment to the pie, not of the existing pie. Moreover, pro-poor growth isprimarily about the distribution of growth between, not within, lower and upper incomegroups. Pro-poor growth merely requires that the proportional income growth of the poorexceed the overall average income growth.

Source: Pernia, Ernesto M. (2003).


Box 9.4: Empowering Technologies in Bangladesh

Rural Bangladesh, where average incomes are less than $200 per year, might not seem likepromising territory for a mobile phone company. But Grameen Phone has shown otherwise.In partnership with the renowned microfinance trailblazer Grameen Bank, it has pioneered anew model for rural telephones based on shared access-one phone per village-operated by alocal entrepreneur. The bank loans a villager, usually a woman, the money to buy a mobilephone; she sells access to the phone to her neighboring villagers, who pay for calls in cash. Asdocumented in an independent study by the Canadian International Development Agency anda more recent analysis by the World Resources Institute, such village phones have been acommercial success, each phone generating revenues that average $90 per month-twice whatthe company earns from its urban mobile phones. The pent-up demand for telephone serviceand the ability and willingness of poor people to pay for it have turned out to be enormous.Not only are the phones profitable; they have also been a social success, providing economicbenefits and improving the lives of villagers in ways that put most antipoverty programmes toshame. Incomes of the phone entrepreneurs have risen sharply. And phone calls can nowsubstitute for a trip to the city that would cost villagers ten times as much as a call. The villagephones have helped people working abroad send money to their family back home, enabledfarmers to get fairer prices for their crops, and allowed people to discuss important occasionswith relatives.

Source: Hammond, Allen., L. 2001. “Digitally Empowered Development”. Cooperation South, UNDP,Number One.


local governance and developmentprogrammes. It uses social mobilizationas a tool for inspiring the local peopleto form their own communityorganizations, to promote developmentthrough their own and other resources,and to actively participate in decision-making process for improving lives andtheir surroundings. The impact has beenphenomenal in terms of improving thequality of life on the one hand andbreaking social taboos on the other. Ithas provided avenues for incomegeneration, greater social mobility,helping people to get their childrenadmitted to schools, etc. (Box 9.7).

9.7. Summing UpIt has been observed in this chapter thatthe human development profile of theSouth Asian countries poses dauntingtask for the policy makers of the region.This has also been corroborated by theconcept of the poverty elasticity ofgrowth. In this background, it may behighlighted that the region might find itdifficult to achieve the UN MDGs. Thechapter also highlighted some of the


Box 9.5: Growing Pristine Mountain Aromatic and Medicinal Plants in Bhutan

About 85 per cent of the Bhutanese population live in rural areas. Thus, in the promotion of sustainable livelihoods, the stress isnecessarily on sustainable increases in agricultural productivity and the development of potential in such areas as horticulture, where Bhutanhas a comparative advantage. The sustainable development of horticulture is able to increase the incomes and nutritional standards of the ruralpopulation, especially the poor.

Horticulture development has greater potentials than the development of food grains for raising incomes, improving the welfare andquality of life of rural households and promoting rural industrialization. In line with this national objective, UNDP is supporting six of theeight components of the National Horticulture Action Plan through a technical assistance programme amounting to US$ 6.5 million. The sixcomponents are: coordination, marketing, post harvest storage and quality control, technology development, extension and cultivation, andprocessing of aromatic and medicinal plants. UNDP intervention is being used to strengthen national capacities in these areas complementedwith on the ground activities including, developing/testing appropriate technologies, promoting new crops, etc., so as to develop and supporta vibrant horticulture industry.

The Integrated Horticulture Development Programme has made some significant progress particularly under the aromatics and medicinalplants component and that too most significantly with the development of essential oils industry from lemongrass (Cymbopogan flexuosus),which grows in abundance in the chirpine forests of four out of the six eastern districts. The principal economic value of the lemongrass is thelemongrass oil which is steam distilled from the fresh lemongrass, available from June to November every year. The oil is used in manufacturingvitamin A and in the flavour, cosmetics, perfumery and soap industries. With its low level of investment and comparatively high returns, thedevelopment of lemongrass essential oil industry in the four eastern districts has come as a boon for the farmers where cultivation andtraditional agriculture is a daily struggle against the harsh and steep topography of the region.

For some poor Bhutanese farmers in the east, the development of lemongrass oil industry has played a significant role in improving theirlivelihoods. “It has enabled me to replace the roof of my house with more durable corrugated iron sheets – a dream come true for me “ saysMr. Chador from Mongar, a district in the east. “It also enables me to buy proper school uniforms for my two sons” continues Mr. Chador.

It has been estimated that about 746 households or over 4400 people are engaged in lemongrass production generating an income of US $973,000.

Source: http://www.undp.org/rbap/bhutan.htm

Box 9.6: Mechanized Fishing BoatsTransform Lives of Maldivian Fishermen

Reversing several centuries of traditional fishing by sailboat, mechanization of the masdhoni(fishing boats) has truly contributed to trade and the alleviation of poverty. The rural fisherfolkdoubled their fish catch and their incomes increased considerably.

The UNDP project of $326,370 led to a World Bank loan of $3.2 million. A revolving fundwas created to lend money to fishermen for boat engines. The loans had a 9 per cent interestrate and were repayable over 8 years. The new masdhoni was seven times faster and muchmore maneuverable.

Since then, in little more than a decade, the fish catch has increased more than three-fold,from 30,000 metric tonnes to more than 100,000 metric tonnes annually.

An improved design and mechanized masdhoni, called the “second generation” fishingboat, was developed and introduced, providing versatility and ability to travel further tofishing grounds that traditional masdhoni could not. Since fishing boats were traditionallyowned and operated at the community level, the project made a huge impact on people’sincomes. It would be no exaggeration to say that the lives of the rural island population as wellas Maldivian fisheries were transformed as a result of the project.

The resulting loan scheme was the first large-scale credit programme in the country. It wasthe first time fishermen had borrowed money from an institution, yet the repayment rateswere almost 100 per cent. Today 90 per cent of the fishing boats or masdhoni in the Maldivesare mechanized.

Source: http://www.undp.org/rbap/maldives.htm

regional efforts for poverty alleviationunder the SAARC and brought out someof the implications of increased globalcompetition for devising social safetynets. Emphasis has been laid on sharing

the experiences and mutual learningfrom successful experiments thathelped reducing poverty, increasingemployment, income generation, tradeaugmentation and development at large.



Box 9.7: Breaking Social Barriers in Nepal

The transformation started taking place five years ago when the Village DevelopmentProgramme (VDP) started spreading. The Participatory District Development Programme(PDDP) initiated the VDP in 1996 as one of the key components directly associated withbuilding a sustainable institutional foundation toward poverty alleviation initiatives at thegrassroots.

The PDDP takes VDP as a primary channel of implementation for participatory andsustainable local governance and development programmes. The PDDP works in 30districts and the VDP is being implemented in 334 VDCs, a affecting the lives of 218,272villagers. As a people-centered programme, the VDPs main thrust is improving livelihoodsat the household level for alleviating poverty. It uses social mobilization as a tool forinspiring the local people to form their own community organizations, to promote theirdevelopment through their own and other resources, and to actively participate in decision-making process for improving their lives and their surroundings. The VDP’s approach isto encourage participation of men and women in decision-making processes as well as toenhance their voices and choices through their own organization at the grassroots.

Within a shorts span of time, the VDP has had dramatic results not only in theoverall improvement in the life of the villagers but by breaking in the caste barriers aswell. Says Thule: “We have become acceptable to society. Our children go to school withthe other children. They do not have to listen to taunts. People welcome us in theirhomes.” The change has boosted the self-confidence of Thule. When the pots and panshe had made did not find a good market, Thule was disheartened - but not for long. Hedecided to switch to vegetable farming, and started cultivating tomato in the land stretchingover three ropanis. He instantly made a Rs. 40,000 profit – something he had neverimagined. His lifestyle has undergone a drastic change - socially, economically andpersonally. The change in Thule Biswokarma’s life is quite visible. He has constructed anew toilet in his house thanks to the initiative by his community organization. He hassome money - enough to avoid the embarrassment and insult he used to face runningfrom door to door of the upper cast people. He has gained enough confidence to talk tothe same people whose face he hardly had the courage to look at. “I am very happy withthe turn of events,” says Thule. He owes his happiness to the VDP. It has given villagerslike Thule the freedom to implement local programmes and projects by themselves. Thevillagers are mobilized from groups irrespective of caste and ethnicity. And the groupsinitiate programmes for themselves.

As the government embarks on improving the status of so-called low-castes, also knownas the Dalits, this could be a model worth emulating. The recently formed National Commissionfor the Dalits could well take a leaf out of the Saathighar Village Program to change the fortuneof the Nepalese Dalits, who account for a fifth of Nepal’s 23 million people.

Source: http://www.usaid.gov/countries/np/success/success1.htm

Endnotes1 See RIS, 2002 for details.

2 for a more detailed analysis see RIS, 2002for details.

3 UN, 2003.

4 Panchamukhi and Das, 1999.

5 Panchamukhi, Kumar and Das (forthcoming).

6 Prabhu and Iyer, 2001.

ReferencesPanchamukhi, V. R., and Ram Upendra Das.

1999. “Economic Reforms, RegionalIntegration and Labour Markets in theSAARC Region”. SAAT WorkingPapers, ILO, New Delhi.

Panchamukhi, V. R., Nagesh Kumar and RamUpendra Das. 2004. “EconomicReforms and Implications for LabourMarkets”. In Agarwala, R., NageshKumar and Michelle Riboud, (eds.):Reforms, Labour Markets and SocialSecurity in India. Oxford UniversityPress for RIS and the World BankInstitute.

Pernia, Ernesto M. 2003. Pro-Poor Growth:What is it and How is it Important?,ERD Policy Brief Series No. 17.

Prabhu, Seeta K. and Iyer, Sandhya V. 2001.“Public Provision of Social Security:The Challenge in South Asia”. SouthAsia Economic Journal, Vol. 2, No. 1,January-June.

RIS. 2002. South Asia Development andCooperation Report 2001/02. NewDelhi.

SAARC Secretariat. 2003. SAARC RegionalPoverty Profile 2003.

UNDP. 2000. Human Development Report2000. New York: Oxford UniversityPress.

UNESCAP. 2003. Promoting the MillenniumDevelopment Goals in Asia and thePacific: Meeting the Challenges ofPoverty Reduction.

South Asia Development and Cooperation Report 2004South Asia has sustained an average growth rate of 5.5 per cent per annum over thepast two decades despite many external and domestic shocks, making it one of themost dynamic regions in the world. With more than a decade of reforms behindthem, the region’s economies are more intensively integrated with the global economy,growth of income and exports display promising outlook and inflation rates are incheck. Despite such achievements in terms of economic performance, however, theregion is home to more than two fifths of the world’s poor. The region also fares verypoorly in terms of different indicators of human development such as education,health, nutrition, among others. Therefore, the region needs to further accelerate itsgrowth process with an emphasis on human development and strengthencompetitiveness to deal with the daunting challenges of alleviation of poverty, hunger,illiteracy, and disease.

The South Asia Development and Cooperation Report 2004 (SADCR 2004)argues that the region can face these challenges much more effectively as a grouprather than individually. The regional economic integration can, by exploiting thesynergies, expand the economic opportunities available and strengthen the growthprospects. The recent experiences with economic integration, in the region, suggestthat it leads to expansion of trade and development in a balanced and sustainablemanner. In the light of these experiences and against the backdrop of mushroomingregional trading blocs in different parts of the world, the Report finds a compellingcase for the region expeditiously effecting its transition into an economic and monetaryunion by implementing SAFTA, forming a SAARC Customs Union and introducing aSouth Asian parallel currency, as an intermediate step to a single currency.

Among the key sectors presenting opportunities for mutually beneficialcooperation, SADCR 2004 selects transport infrastructure. Transport infrastructureis not only an important determinant of economic development but is also critical inexploiting the gains of economic integration resulting from geographical proximity.The Report also presents a detailed analysis of the capabilities, potential and challengesfor mutually beneficial cooperation in the area of biotechnology that has tremendouspromise for promoting food security and hence alleviation of poverty and hunger inthe region.

These are some of the issues addressed by the Report.

RISRIS is an autonomous policy think-tank, based in New Delhi specialized in trade anddevelopment issues. Its work programme focuses on multilateral trade negotiations,regional economic cooperation in Asia, new technologies and development, amongother issues. The work of RIS is published in the form of research Reports, books,discussion papers and journals. For more information about RIS and its workprogramme, please visit its website: www.ris.org.in.

Research and Information System for theNon-Aligned and Other Developing CountriesCore IV-B, Fourth Floor, India Habitat CentreLodhi Road, New Delhi-110 003, India.Ph. 91-11-24682177-80 Fax: 91-11-24682173-74-75Email: [email protected]: http://www.ris.org.in

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