Economic Growth in South Asia was triggered off by the first-generation policy reforms, including greater global integration, macroeconomic stabilisation, and economic deregulation. Trade restrictions including import tariffs were reduced. The scope of the state was reduced through economic deregulation to enhance the role of the private sector as the engine of growth. These reforms made the South Asian countries more stable, competitive, and adaptable. It helped to overcome three key constraints to growth (Spence, 2005):
* Exports to the rest of the world relaxed the constraint from capacity to consume domestically.
* Inflow of remittances relaxed the constraint from capacity to save domestically.
* In-bound technology and knowledge transfers through increased trade rapidly moved the production possibility frontier outward.
While South Asia made significant progress in integrating with the global economy, integration within the region remained limited. South Asian countries have maintained a higher level of protection within the region than with the rest of the world. Restrictive policies within the region have neutralised the beneficial effects of common cultural affinity, common geography, and the 'gravitational' pull of proximity on movement of goods and people within the region.
Since the 1980s, the South Asian countries (1) have been growing faster than the rest of the world. However, the international environment is becoming more competitive and demanding. In addition, higher education and innovation are becoming more critical for countries to be able to benefit from the increasingly globalised international environment. Therefore, South Asian countries have to improve their skills and innovation capabilities. Here we will assess the position of South Asian countries and propose some of the key actions that they need to take to strengthen their technology and innovation capabilities to improve their economic performance and welfare.
This paper covers the five largest South Asian countries. They range from Sri Lanka and Nepal, which have around 20 million inhabitants each, to India, the second most populous country in the world with slightly more than one billion people. In terms of gross domestic product (GDP) per capita, four are in the World Bank's low income category (per capita income less than US$765 in 2003) with Nepal at the very low income level, to Sri Lanka, which just makes it into the lower middle income category (US$766-3,035) (Table -1).
Each of the five has had rates of growth above the world average for the period 1980-90 and 1990-2003, with Pakistan having the highest rate of growth in the decade of the 1990s and India the highest in the 1990-2003 period (Table-.2). In fact in the last years India has achieved a spectacular rate of growth of 8 percent. 5
To put them in the global context, it is instructive to compare their shares in the global population with those in global GDP and trade. Because, they are low income countries, their share in global GDP is much lower than that in global population. At the higher end, Sri Lanka's share in global GDP is 17 per cent of its share in population, while that of Nepal is just 5 per cent. With respect to exports, Sri Lanka's share of global exports actually exceeds it share of global GDP by 40 per cent, indicating it is an export-driven economy. The shares of the four other countries range from just 44 per cent (India, the least export oriented) to 70 per cent (Pakistan). While the share of exports in global exports between 1990 and 2003 increased by 80 per cent for Bangladesh and 40 per cent for Sri Lanka and 45 per cent for India, Pakistan and Nepal just maintained their relative shares (Table -3).
In terms of the share of exports of goods and services in GDP, only Sri Lanka, with 36 per cent, is above the world average of 24 per cent (Table--4). India is particularly low at just 14 per cent, in fact, one of the lowest in the world in spite of its considerable service exports particularly in the information technology services for which it is so well-known worldwide. With respect to merchandise exports, the majority in all countries are manufactured products. With the exception of India and Sri Lanka, the share of manufacture in merchandise exports exceeds the world average. However, only a very small percentage of them are high technology products.
Knowledge Revolution in the New Competitive Context
The world is in what could be called a knowledge revolution. There has been a speed up in the production and dissemination of knowledge based, in part, on advances in information processing and communications technologies, as well more general advances in the science base and in ability to codify knowledge. The rapid reduction of transportation and communications costs made possible by technological progress in all means of transportation and information technologies (IT), combined with liberalisation of trade in goods and services, are leading to a rapid increase in the volume of goods and services that are traded. Between 1990 and 2003, the share of imports and exports in GDP increased from 38 to 48 per cent of global GDP. In addition, 27 per cent of global value added is being produced by multinational corporations (MNCs), meaning that nearly one-third of world GDP is produced by corporations spanning multiple markets and national jurisdictions (2) This is actually an underestimate of the degree to which global production is interlinked, because it does not include all the indirect effects through the integration of supply and distribution chains.
MNCs are also the key agent in the creation of knowledge, since the resource and development (R&D) done by multinationals accounts for the large majority of R&D done by the private sector, and private R&D has become larger than public R&D as a result of the decrease in global defense budgets that occurred after the end of the cold war.
Thus, countries like China and India have become magnets in the creation of major new platforms in the exports of production and services. The nature of competitiveness is also changing. Traditionally, it was based on lower capital or labour costs, or of other local inputs, including infrastructure services, while also depending on the economic and business environment. Although these fundamentals continue to play a key role, given the very rapid rate of development and dissemination of new knowledge globally and the pressure to restructure, there are important new elements, including the ability to:
* Rapidly redeploy resources in order to capture new opportunities.
* Ensure the quality, skills, and flexibility of labour force (and management).
* Keep up with rapidly changing technological and organisational advances.
* Move to higher value parts of value chain (research/design and marketing, branding, and managing of customer information).
* Make effective use of IT to reduce transactions costs and improve capacity to respond quickly to changing opportunities and threats.
As a result, there is increased attention across countries on improving their overall business environment and the flexibility and speed of their economies to respond to rapidly changing circumstances, improving education and skills systems, and improving their innovation systems and their information infrastructure. With the exception of India, the South Asian countries are not so well placed to take advantage of these …