By Hussain, Ishrat
Economic Review , Vol. 35, No. 7
I would like to address three questions pertaining to the topic assigned to me this morning. The first question is: How hae the South Asian economies fared in the last decade and what are their propects for the future. The second question is: How well they have done compared to other competitor developing regions, particularly East Asia? Finally, how have these countries positioned themselves to meet the challenges of globalization and what should they be doing to maximize the benefits of globalization?
South Asia has grown at 5.6 percent in the decade of 1990's--faster than for low-income countries but slower than the East Asian countries. The wide ranging reforms that have been implemented in this region during the last ten years or so have brought about some fundamental changes in the economic landscape and removed some of the major constraints that were retarding the progress of this region. Let me recapitulate them briefly.
First, there is now a broad political consensus about the thrust and direction of economic policies in almost all the countries. The defeat of BJP Government in the recent Indian elections should not be construed as an indictment of reforms but a manifestation of the growing impatience of the electorate that these reforms have not been deep, pride and fast enough to touch the lives of the majority of the population. This political consensus has survived many changes of the governments in India since 1991 and the alternating shift of power in Pakistan, Bangladesh and Srilanka.
Second, reliance on private sector as the main investor, producer and distributor of goods and services has replaced the old nation of the commanding heights model of the economy in which State and State-owned enterprises were the main tools of industrial development. The demise of Licence Raj has given rise to a healthy competitive environment in which market mechanism is used for allocation of resources. This shift has improved the overall efficiency of resource allocation and utilization in South Asia.
Third, unilateral trade liberatlization has been quite rapid in the 1990's in the whole region. Average tariff rates have declined from 90-100 percent in 1980's to 13-32 percent today. Srilanka leads the way followed by Pakistan. India and Bangladesh are considered laggards in trade liberalization according to a World Bank study, but are in much better shape than what they were in the 1970's and 1980's. Export promotion has finally been accepted as the new gospel in contrast to the past five decades of obsession with inward looking import substitution and protection of domestic industry.
Fourth, domestic financial and capital market reforms have made the financial sector sound and healthy. In Srilanka and Pakistan the strides made are quite advanced. India is slowly and gradually opening up to foreign competition and introducing new legislation to improve the performance of the banks and upgrade the quality of assets. Bangladesh has begun the process more recently but is committed to move forward in the same direction.
Fifth, macroeconomic stability i.e., low inflation, low domestic interest rates, and stable but realistic exchange rates, has become the hall-mark of these economies. Exchange rate regimes in all the countries have switched from fixed to managed float. Bi-directional movement i.e. both, depreciation or appreciation of domestic currency takes place according to market supply and demand conditions.
There is no longer a hang up to defend a particular level of exchange rate and preserving competitiveness of exports and smoothing volatility are the main policy considerations. Large foreign exchange reserves are piling up in all the countries with India's coverage more than 15 months imports followed by Pakistan about 12 months and Bangladesh 4 months.
Sixth, fiscal consolidation and discipline are the furthers in Pakistan with fiscal deficit down to 4 percent of GDP compared to average 7 percent and domestic resource mobilization stepped up in the last five years by almost 70 percent. …