Why South Asia Has Been Left Behind?

By

Shahid Javed Burki
(former Co-Chairman, World Bank-Commenwealth Task Force on Small States)

In looking at South Asia, I will compare its situation with that of East Asia. In looking at the two regions, I will aggregate the performance of five countries in South Asia (Bangladesh, India, Nepal, Pakistan, and Sri Lanka) and five in East Asia (Indonesia, Korea, Malaysia, the Philippines, and Thailand). Thus defined, South Asia had a population of 1.3 billion in 1998, increasing at the rate of 1.8 percent a year. East Asia had a population of 409 million, increasing at a much slower rate. South Asia was much less urbanized compared to East Asia, with only 27 percent of its population living in towns and cities, compared with 35 percent in East Asia. The East Asian countries were also more developed with average per capita income of $1,960 in 1998, compared with $430 in South Asia. The structure of the economies was also very different. In East Asia industry contributed 42 percent to the combined gross domestic product) compared to 26 percent for East Asia.

The story of South Asia is that of missed opportunities. Fifty years ago, when India and Pakistan gained independence from Britain, the level of South Asian economic and social development was not very different from that of East Asia. Now, as the
twentieth century draws to a close, South Asia has been left behind by East Asia. The numbers tell the story:

• In 1997, more than 35 percent of the population of south Asia lived in absolute poverty, defined as those earning less than one dollar a day. The East Asian countries had a much lower incidence of poverty - estimated at 19 percent.
• In 1997, 89 percent of the East Asian population was literate, compared with only 40 percent in South Asia.
• In East Asia, some 20 percent of the children were malnourished compared with 49 percent for South Asia.
• There were severe regional income inequalities in South Asia. In India, for instance, the richest Indian State (Punjab) had per capita income 4.3 times that of the poorest (Bihar). What is even more disturbing is that this trend was increasing. In 1980-81, Punjab's per capita income was 2.8 times that of Bihar. There were regional disparities in East Asia, but they were not that acute.
• In 1997, exports were 51 percent of the East Asian GDP; they accounted for only 17 percent of the South Asian gross domestic product.
• East Asia was clearly a favored destination for foreign direct investment. It received $13 billion in FY97 (7.5 percent of the total FDI for all developing countries), compared with only $3.7 billion for south Asia.

In sum, the South Asian Region:
- Until recently was among the less rapidly growing regions of the world.
-It was also a region marked by extreme social backwardness with sizeable segments of the population excluded from the economic, social and political mainstream. Untouchables in India and the tribes in Pakistan's Baluchistan province belong to this category.
- It was mired in poverty, accounting for nearly 40 percent of the total world population living in poverty.
- It was poorly integrated into the global economy with low trade to GDP ratio and not a favored destination of foreign capital.

What are the reasons for South Asia's poor performance? I would focus on the following six factors:

• All South Asian countries followed economic strategies built around state intervention. In many the state got heavily engaged in the direct management of economic assets. The South Asian countries took their cue from Jawaharlal Nehru's Fabian socialism that dominated economic thinking in India for more than four decades. State was also active in East Asia but its contribution was confined to identifying key areas for development and helping to find resources for investment in these areas.
• In spite of the heavy state involvement, the level of human development remained very low. This is surprising. The South Asian socialism, unlike communism in East Europe and East Asia, did not focus on the development of human resources.
• The state's inability to address the problem of low level of human development was probably the result of the societies that were socially fractured. India's caste system and the dominance of the landed aristocracy and tribal chiefs in Pakistan - to take two examples - stood in the way of launching efforts aimed at social development that produced impressive results in East Europe and East Asia.
• Saving rates - and hence investment rates - were relatively low in South Asia. Culture played a role, as did the absence of institutions that could have encouraged households to save. In 1997, South Asia saved 15 percent of its gross domestic product and invested 22 percent. The seven percent investment savings gap was financed by a combination of foreign aid, workers remittances, and foreign direct investment. In the same year. East Asian countries saved 31 percent of their combined GDP and invested 32.6 percent, leaving a much smaller resource gap.
• Ideology also played a role in keeping the South Asian economies closed to the outside world. The long struggle against British rule developed a number perceptions on the part of the political elite that assumed control of the area after the British left. The South Asian elite believed that the British colonial administration, by opening the Indian economy to Britain, had robbed the colony of wealth and income. Several economic historians spent a lot of time estimating the amount of resources transferred out of British India to Britain during two hundred years of colonial rule. The East Asian countries, probably as a result of the role played by the United States in World War II and the Korean War, were much more open to building strong economic ties with the West.
• Finally, South Asia was the only major region in the developing world that was not able to move towards regional integration. The souring of relations between India and Pakistan soon after the birth of the two countries kept the region from coming together. A very small proportion of South Asian trade is between the countries of the region, while some 40 percent of East Asian trade is intra-regional. Regional association was of great consequence for East Asia.

Could South Asia make up the time lost? Some recent developments hold out hope:

• India began to reform in 1991 and its economy began to pick up right after that. The average growth rate for the country in 1990-98 was 6.1 percent a year, up from 5.2 percent in 1980-90. There was some slackening of the reform effort in the last two years but the new government seems committed to picking up the momentum.
• Pakistan's growth performance has deteriorated in recent years. The GDP growth had declined from 6.3 percent a year in 1980-90 to 4.1 percent in 1990-98. The commitment by the military government that took office in October may result in the country handling some of the deep structural problems previous administrations failed to address.

South Asia has a great deal to catch up with East Asia in terms of greater integration into the global economy. The region, with not a great deal of investment but with proper planning, could leap frog into becoming a participant in the information and biotechnology revolution. Here it could take advantage of its demographic situation with a large proportion of its population young (35 percent of the population of India is under
the age of 15, 44 percent of Pakistan) and good Knowledge of English (the lingua-franca of new technologies). India has already begun to do that.
The number of software firms in India grew from 7 in 1991 to over 130 in 1996. Low labor costs (In 1993 Indian programmers earned $15 to $25 per hour, far less than their similarly skilled U.S. counterparts who earned $50 to $75 per hour), favorable regulation, and large supplies of highly skilled labor have facilitated this impressive expansion. These factors, and subsequent economic success, have been particularly acute in the cities of Bangalore and Hyderabad.

India's remarkable success in establishing a niche for itself in the fast growing global IT market provides an excellent example for other South Asian countries to follow. Heavy investment in technical education, combined with investor-friendly policies, is reaping sizable returns, and will continue to do so in the future. Highly skilled emigrants have forged ties with industrial nations, inducing FDI flows and transfer of technology into India. With proper policies in place, the remarkable success of the IT sectors in Bangalore and Hyderabad could be replicated in other developing countries, serving as powerful engines of growth, and sharply increasing export earnings.

While focus on reforms - macroeconomic, sectoral and institutional - should help South Asia to move forward, some additional policy measures will need to be adopted to accelerate the regional rate of growth. Four areas of additional reform need to be underscored:
• One, South Asian countries need to focus their attention on poverty alleviation. As has been demonstrated in other countries, growth alone will not help. Poverty will continue to work as a drag on the region. Its alleviation will be helped by the acceleration of growth, by the concentration of public resources on primary education and basic health care, and by greater involvement of the disadvantaged communities in defining their economic and social priorities.
• Two, the region will need to focus attention on developing physical infrastructure which, in its current state, cannot support an acceleration in the rate of economic growth. The countries in the region suffer from serious power shortages (the only exception is Pakistan which has a surplus of power but the private sector investments that made that possible have imposed a serious fiscal and balance of payments burden on the country), poor road and railway network, clogged ports and underdeveloped air-transport. Since all the states are under-resourced, there will have to be public-private partnership for developing infrastructure.
• Three, there is the need in the region for taking economic decision-making close to the people. South Asia has a tradition of strong central governments but the demands of the time require decentralization. This has begun to happen in India but in response to some recent political developments – the virtual collapse of the Congress Party -'and not because of economic compulsions. The new Pakistani leader has also expressed a strong interest in decentralization. However, Bangladesh remains highly centralized.
• Fourth, South Asia is in the position to take advantage of the presence of large numbers of its citizens in Europe and North America. The South Asian diasporas have already begun to play an important role in the development of the region. India, Pakistan and Sri Lanka are now among the twenty largest recipients of remittances in the world. Together they received nearly $13.6 billion in 1996 out of a world total of $58 billion. The Indian diaspora is actively engaged in developing software and information technology in their homeland.

The main point I wish to make by way of concluding this short presentation is that South Asia's relative backwardness is not the result of factors that cannot be overcome. It was because of policy failures and intra-regional antagonisms that the countries of the region have been left behind. They could quicken the pace of growth if policies supportive of development could be adopted, and if the problems that have prevented regional integration could be resolved.

The story of South Asia is that of missed opportunities. Mr. Burki will take a look at South Asia in comparison to Fast Asia.

Mr. Shahid Javed Burki started his career as a member of the Civil Service of Pakistan. He held various positions including Director of West Pakistan Rural Works Program, Economic Advisor to the Governor and Chief Economist of West Pakistan, and Economic Consultant to the Ministry of commerce. In 1974, Mr. Burki joined the World Bank as Senior Economist in the Policy Planning Division. He was promoted to Division Chief of the Policy Planning and Program Review Department and later became Senior Economic and Policy Advisor in the Office of the Vice President of External Relations. After becoming the Director of the International Relations Department of that vice-presidency, he was appointed Director for china and Mongolia, helping to design and implement the World Bank's lending program in China-at one point the largest Bank financed program in the world. Mr. Burki was appointed Vice President of the Latin America and Caribbean Region and worked in this position until his retirement in August, 1999. Upon leaving the Bank, Mr. Burki was invited to head the EMP-Financial Advisors, LLC, a consulting firm located in Washington, D.C. Mr. Shahid javed Burki was educated at Government College, Lahore; Christ Church, Oxford University (where he was a Rhodes Scholar) and Harvard University (Kennedy School and Economics Department). He holds graduate degrees in Physics and Economics