04 - South Asian Economic Blues by South Asian Media Net

Editor Imtiaz Alam Executive Editor S. Akbar Zaidi Assistant Editor Ms. Zebunnisa Burki Consulting Editors

Contents South Asian Economic Blues

In This Issue SAFTA : A Critique Dr Saman Kelegama

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Aid, Governance and Ownership Professor Rehman Sobhan

Neo-liberal Reforms Jayati Ghosh

Informal and Free Trade Arrangements Nisha Taneja

Pakistan, India and Regional Cooperation Shahid Javed Burki

Women and Development in South Asia Dr Preet Rustagi

Publisher Free Media Foundation

India-Pakistan Trade S. Akbar Zaidi

Facilitator South Asian Free Media Association (SAFMA)

India: State of the Economy Dr Rajesh Mehta

Bangladesh Enayetullah Khan India K. K. Katyal Nepal Ms. Bandana Rana Pakistan I. A. Rehman Sri Lanka Ms. Sharmini Boyle

Address 09-Lower Ground, Eden Heights, Jail Road, Lahore, Pakistan. Tel: 92-42-5879251; 5879253 Fax: 92-42-5879254 Website : www.southasianmedia.net

Pakistan: Performance and Prospects A. R. Kemal

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Bangladesh: An Alternative Paradigm Dr Q. K. Ahmed

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Sri Lanka: Peace and Economic Reforms Dushni Werakoon

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Nepal: Low Equilibrium Trap Dr Gunanidhi Sharma

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Caste Politics in India Aditya Nigam

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The South Asian Century Many people believe that the 21st Century will be Asia's Century. With China already showing huge promise to lead Asia towards development, towing East Asia along and outpacing Japan, the other regions in Asia are of particular interest. Central Asia and West Asia from Iran to the Levant, while having huge potential and large reserves of oil, still have a way to go before they show trends that suggest that they are headed for high levels of growth. On the other hand, the region of South Asia comprising seven large and very small nations is already being called the next East Asia, and India, the next China. There are some analysts who suggest that by the year 2050, China and India will be amongst the leading economies of the world, equalling, if not surpassing, the U.S., Europe and Japan. Within South Asia, India's already dominating presence is likely to grow even larger; by being the only country which shares borders with all the other countries of South Asia, and being the only neighbour to all the other six, with 75 per cent of South Asia's land mass, and of its population and economy, India looms large over the region. The progress and future of the 1.4 billion people of South Asia will depend on the political economy of the region and where India takes it, and how the other smaller countries can benefit from this dynamism. However, there are genuine fears that the smaller South Asian countries will be swamped by India and all things Indian; clearly there is a need, especially by India, to allay such fears and to take unilateral measures- such as allowing zero-tariff imports from other South Asian countries- which account for greater trust and mutual cooperation.

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countries. The successes of growth have not translated into overall and equitable development for all people of the region. In Pakistan, for example, the reforms have led to the rise in poverty levels, while analysts feel that in the case of India, growth has taken place without the creation of jobs. In Bangladesh, there are fears that the recent boom will collapse in a quota-free world for textiles, Bangladesh's main export. Apart from India, the other countries have a narrow base for exports and for manufacturing, which may limit future benefits. In order to address the specific issues which address these countries collectively, the idea of regional cooperation in the form of a free trade agreement, perhaps leading to an eventual economic union, have been floated. Regional blocs have been one form to effectively limit the damage caused by globalisation. However, trade and economic relations in South Asia are constrained by the problems that exist between India and Pakistan, because of which South Asia cannot move ahead. Both India and Pakistan are holding back progress in the region and need to sort out their numerous problems. While there is a great deal of logic and benefit in the South Asian countries forming a trading bloc, unless contentious issues between countries are resolved, South Asia will not emerge as an economic powerhouse. With 300 million of its inhabitants in poverty- sixty per cent of the world's total- peace and regional cooperation will have to go hand in hand. Without this, South Asia's desire to be part of the Asian Century, will remain a mere pipedream.

All the countries of South Asia, especially the larger four, have been undergoing economic reforms for more than a decade. The results and outcomes of these reforms have been mixed, and depend a great deal on internal and domestic conditions. For example, India being the most stable of the lot and perhaps having the best initial conditions, has led the way with growth rates exceeding 6 per cent per annum for over a decade, and with growth projected to rise to even higher levels. Pakistan, Bangladesh, Sri Lanka and Nepal, have had to deal with domestic political strife, changes in government and instability, and have shown growth trends which are less impressive. However, whenever stability and peace has emerged- as the case of Sri Lanka and Pakistan shows- there has been some growth. As a region, however, South Asia has shown promising trends and in most countries, per capita income levels have increased significantly over the last decade. Yet, there has also been an increase in income and regional inequalities within

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Neo-liberal Reforms

In This Issue (The views expressed in this journal are solely those of the authors)

SAFTA: A Critique Dr Saman Kelegama, Executive Director of the Institute of Policy Studies of Sri Lanka, unlike many enthusiasts of the South Asian Free Trade Area (SAFTA) agreement signed in Islamabad earlier this year, presents a thorough critique showing what is wrong with this agreement. He traces the history of trade agreements in SAARC and shows how it has been very slow at developing any substantive agreement, except SAPTA, although this covered a limited number of commodities. SAFTA has come at a time when the trading environment in South Asia has seen the emergence of a number of parallel regional and pan-regional initiatives involving most South Asian countries. He is very critical of the fact that the Group of Eminent Persons (GEP) Report was not sufficiently considered when drawing up SAFTA. He examines many clauses in both the GEP Report as well as in SAFTA to show the weaknesses in the latter. He concludes by saying that, under the circumstances, one should not expect much from SAFTA.

Aid, Governance and Ownership Professor Rehman Sobhan, Chairman of the Centre for Policy Dialogue (CPD), Bangladesh, presents a well-argued paper which looks at aid, donors and governance- all in the context of political economy where there is unequal manifestation and use of power between donors and aid recipients. He presents a historical account of how aid allocation has changed over the decades, as donor perspectives have altered under the influence of worldwide market reforms. 'Good governance' has been made a prerequisite by donors for aid recipients. While countries in South Asia have moved towards open-market economies, he questions the claims made by the proponents of liberalisation who argue that there have been tremendous benefits to reforming countries. Sound economic management (a pseudonym for good governance) has been said to be essential for quality growth, but he argues that this is very difficult to measure, observe and quantify. Prof. Sobhan argues that the conceptual link between governance and economic performance is quite unclear. He also shows how donors exercise a considerable degree of political influence on some of the countries of South Asia and uncovers the duplicity of donors who have never shied away from supporting military regimes. He concludes by saying that the South Asian countries should be left to design their own policy agendas and articulate their own needs for aid.

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Jayati Ghosh, professor of Economics at Jawaharlal Nehru University, New Delhi, presents a somewhat critical view, different from the conventional wisdom, regarding the successes achieved in South Asia as a consequence of neo-liberal reforms. While South Asian economies, including India's, have been stable in recent years and not exposed to the sort of crisis that took place in East Asia, her contention is that this picture of improved performance is illusory. She argues that there has been increasing income inequality in all the countries of the region, which is reflected in inequalities between regions, classes, and urban and rural areas. Similarly, she shows that employment generation has slowed down and, at the same time, poverty has either increased or stagnated. Along with this, there has been a decline in manufacturing and casual and part-time work has increased at the cost of organised labour. She examines the nature of structural adjustment and liberal policies and shows their impact on these economies. She also shows why neo-liberal policies are in place. By demonstrating that there are a large number of beneficiaries of such policies and globalisation, she explains how these political groups have been able to capture power and enforce these policies, resulting in prosperity for some and impoverishment for others.

Informal and Free Trade Arrangements Nisha Taneja, Fellow at the Indian Council for Research on International Economic Relations (ICRIER), New Delhi, looks at informal, rather than formal, trade in South Asia. While recognising that it is not easy to quantify illicit and informal trade, her estimates show that this is usually official trade. She presents cases of trade between different sets of countries in South Asia explaining why this trade takes place and discusses the nature of this trade. Trade policy distortions, such as high tariffs, encourage informal trade in South Asia, as do non-tariff barriers. There are also institutional factors which favour such trade and include ethnic ties, informal money and exchange markets allowing trade to proceed unhindered by foreign exchange regulations. There is also the issue of complicity of many vested interests who benefit from informal trade. She argues that SAFTA and other bilateral trading agreements will lead to a reduction of informal trade, although it will not be totally eliminated.

Pakistan, India and Regional Cooperation Shahid Javed Burki, a former World Bank Vice-President, argues as to why there should be greater cooperation and trade between countries in South Asia, particularly between India and Pakistan. His main argument is that full and unconstrained resumption of trade on the basis of MFN (most favoured nation) status granted by both Pakistan and India to each other, holds a lot of promise for the people of South Asia. With empirical evidence on why there should be

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regional trade agreements, he shows how such agreements allow for greater economies of scale and better use of resources. He cites one study to establish that the free exchange of goods and commodities between India and Pakistan would have resulted in a nine-fold increase in the flow of trade between them over a five to ten year period. Identifying the areas where trade between the two countries would be most beneficial, he suggests that the building of trade ties between the two countries, rather than first solving the Kashmir problem, should be at the centre of the evolving dĂŠtente.

Women And Development Dr Preet Rustagi, Junior Fellow at the Centre for Women's Development Studies in India, writes about the status and situation of women in the countries of South Asia, warning us about the problems that exist in making such comparisons in a very diverse environment. She uses a number of important social and economic indicators which highlight the position of women in these societies. Women's work, for example, is explored despite the fact that their contribution is not properly recognised or enumerated in government statistics. Nevertheless, even the limited formal contribution to the economy by women shows that there is increasing involvement in economic participation across the region. The majority of women work in agriculture and in the urban informal sector. Looking at health and education indicators, she shows how cultural biases and discriminatory practices act as a constraint for women to access such services. Although there has been some improvement in women's status, including political participation, gender discrimination is still pervasive in South Asia.

India-Pakistan Trade S. Akbar Zaidi, a Karachi-based independent social scientist, argues that there are large trade-related advantages to governments and consumers in both India and Pakistan if they start trading, and many positive externalities are likely to emerge as a result. The most important argument made in this paper is that given Pakistan's state of the economy, especially compared to India's, it is in Pakistan's interest more than it is India's, to have normal trade relations with each other. He shows that, despite an unfavourable trade, economic and political environment, there is already substantial trade between Pakistan and India which has even greater economic possibilities. Surprisingly, India emerges as Pakistan's 16th biggest trading partner in terms of imports and Pakistan imports more from India than it does from France, Canada, Switzerland, the Netherlands, Turkey, Iran or even Thailand. He argues that there is no economic rationale for either country not to trade with each other, and that trade between the two is a win-win situation for both.

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India: State of the Economy Dr Rajesh Mehta, Senior Fellow at the Research and Information System for Non-Aligned and other Developing Countries (RIS) in New Delhi, looks at the reform process in India which has led to phenomenal growth rates all through the 1990s. Since India's was one of the most closed economies in South Asia, the extent of liberalisation that has taken place has been quite extensive. India's growth rate has increased to above 7 per cent per annum, and on average was 6 per cent for the decade of 1990s. While many analysts think that India has been 'shining' for most of the the 1990s, it is a little known fact that India had already started showing high growth rates in the 1980s as well (the 1980-90 average was 6.8 per cent). Mr. Mehta shows that most of India's social and economic indicators have improved considerably over the last two decades and poverty levels have fallen from 55 per cent in 1973 to around 26 per cent at present. India continues to set high growth targets of around 8 per cent for the Tenth Plan Period 2002-07, but requires additional reforms in the fiscal and trade sectors to sustain current growth rate.

Pakistan: Performance and Prospects A.R. Kemal, Director of the Pakistan Institute of Development Economics (PIDE), Islamabad, presents a large degree of data highlighting the consequences of Pakistan following through reforms that have taken place since the end of the 1980s. He presents a sector-wise analysis looking at the nature of the reforms undertaken and the consequences for each sector as a result of the reforms. Despite numerous interventions in the fiscal and monetary sector, such as increased taxation, changes in the structure of taxes, etc., he shows that total revenues have not increased appreciably since 1987 and that the tax revenue/GDP ratio has not moved from 13.8 per cent as it stood in 1987. In terms of trade, he shows that the degree of openness of Pakistan's economy measured by its trade exposure has increased from around 28.3 per cent of GDP in 1987 to 32.4 per cent now. His paper has details about Pakistan's debt profile, rates of investment, trends in savings, foreign investment, employment generation, poverty, and a host of other indicators. He concludes his paper by arguing that if investment were to take place, there might be hope for better living standards for most Pakistanis.

Bangladesh: An Alternative Paradigm Dr Qazi Kholiquzzaman Ahmad, Chairman of the research organisation Bangladesh Unnayan Parishad (BUP), looks at Bangladesh's economic achievements and failures over the last decade with the initiation of economic reforms. He shows that Bangladesh's growth rate has increased in recent years, although it is still around 5 per cent at present. An important reason for the stagnation of the growth rate is a lack of increase in investment which has been

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around 23 per cent. The domestic savings ratio has also been stagnant, while Bangladesh's export regime is fairly narrow with five groups constituting 80 per cent of all exports. Bangladesh also suffers from the same problems which afflict other countries, such as corruption, inefficient choice of investment, and capital flight- all explaining low growth. Nevertheless, since 1999, the growth rate has been above 5 per cent in all but one year, although the poverty rate still stands at 50 per cent- classified as poor and 30 per cent as 'extremely poor'. In addition, income disparities have also been increasing.

Sri Lanka: Peace and Economy

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Caste Politics in India Aditya Nigam, Fellow at the Centre for the Study of Developing Societies (CSDS), New Delhi, looks into the caste factor in defining social agendas, both by the proponents of deprived Other Backward Classes (OBCs) and the modernists who reject it for being casteist and archaic, especially after the implementation of the recommendations of the Mandal Commission. He shows how dominant castes continue to resist the inclusion of Dalits and OBCs into the mainstream and alleviation of their suffering in the name of modernity. Similarly, the author analyses the inner conflict between the Dalits (untouchables) and the relatively well-off but deprived OBCs, and its ramifications on political alliances.

Dushni Weerakoon, Fellow at the Institute of Policy Studies of Sri Lanka, presents a political economy perspective of the economic reforms that have taken place in Sri Lanka since the late 1970s. He shows that there has been a great deal of structural transformation of the Sri Lankan economy over the years and that, as in the case of many other countries, the services and industrial sectors have replaced agriculture as the main contributor to the economy. Sri Lanka saw two generations of reforms which were very typical and mirror those that have taken place in Pakistan. While the results under such reforms tend to be 'mixed', the more interesting factor which distinguishes Sri Lankan economy from other countries has been its domestic war and longstanding ethnic conflict. Weerakoon shows that the costs of this domestic war have been quite severe, and only after the peace initiative and cease-fire in early 2001 did the economy pick up some steam. However, in recent months, the political system in Sri Lanka has suffered a serious shock from differences between the Prime Minister and the President, which have had an adverse impact on the economy. With this impasse likely to persist, it seems that the gains made by Sri Lanka in the last three years may not be sustained.

Nepal: Low Equilibrium Trap Dr Gunanidhi Sharma, professor of Economics at Tribhuvan University, Kathmandu, traces the history of developments in Nepal which have had an impact on the economy of that country. He elaborates on the relationship Nepal has had with its neighbours, particularly India, and shows how this has affected Nepal's development. Nepal's economy has not been doing very well in recent years, with growth rates low or negative, and with poverty in excess of 42 per cent of the population. With 87 per cent of the population in rural areas, agriculture (and tourism) dominate the economy. Due to deteriorating political conditions and the ongoing Maoist insurgency, there has been a destruction of infrastructure, which has had a negative impact on agriculture, tourism and economy. Professor Sharma argues that Nepal's economic policies have been India and urban-centric which have made the situation worse.

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SAFTA : A Critique Dr Saman Kelegama

I. Introduction SAARC is well reputed for limited achievements on core issues. The fact that the South Asian Free Trade Area (SAFTA) agreement was signed at the 12th SAARC Summit in January 2004 is in itself an achievement. SAFTA was long overdue, the turbulent South Asian regional politics having often delayed its finalisation. In fact, there was a time when it appeared that SAFTA would remain only a vision (Kelegama, 1996, Mukherji, 2002).

AFTA was first mooted at the 8th SAARC Summit in Delhi (1995), it was suggested then that it should come into operation by 2005. This date was revised at the 9th SAARC Summit in Male (1997), where it was declared that SAFTA should come into operation by 2001. However, the 9th SAARC Summit also took a decision to appoint a Group of Eminent Persons (GEP) to draw up a vision and a roadmap for SAARC. Obviously, the GEP had to look at SAFTA and its feasibility by 2001. At the 10th SAARC Summit in Colombo (1998), the GEP report was presented which stated that a more realistic timetable for SAFTA is 2008 and, for the least developed countries in South Asia this date was extended to 2010 (GEP, 1998). At the Colombo Summit, the date for SAFTA was postponed without specifying any time bound target, but a decision was taken to have a 'Framework Treaty' by the year 2001. Due to regional politics, the preparation of the Treaty got delayed and it finally came into shape by January 2004. In this paper, an attempt is made to examine the SAFTA agreement that was signed by the Foreign Ministers of the SAARC member countries at the 12th SAARC Summit. First, a brief survey is made in Section II on SAPTA. Section III then makes an assessment of the SAFTA agreement in the light of the GEP report recommendations. Section IV has some concluding remarks.

II. SAPTA to SAFTA While the debate for the SAFTA timetable was going on, there was some progress in the South Asian Preferential Trading Arrangement (SAPTA) which came into operation in December 1995. By the time of the 10th SAARC Summit in July 1998, two rounds of SAPTA had been completed and close to 2,126 products were under tariff preferences but the progress had been slow (IPS, 1999: 22). It adhered to four modalities for tariff negotiations, viz., (a) product-by-product approach, (b) acrossthe-board tariff reduction, (c) sectoral tariff reduction and d) direct trade measures. The third round of SAPTA was completed by November 1998. By early 2000, the

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results were far from satisfactory, and a case study for Sri Lanka observed: 'SAPTAâ&#x20AC;Śhas had no significant impact in changing the existing trade pattern of Sri Lanka vis-Ă -vis its South Asian partners' (Weerakoon and Wijayasiri, 2001: 21). Mukherji (2002: 98) concluded: 'Except for India, none of the other contracting states has conceded meaningful tariff cuts. The effects of trade liberalisation are thus modest.'

he progress of economic cooperation under the SAPTA umbrella and the design of a SAFTA agreement got delayed during the period 1999-2001 due to the deterioration of Indo-Pakistan relations1. An attempt was made in December 2000 by a newly formed South Asian Citizen's Commission to pressurise SAARC member states to get the SAFTA 'Framework Treaty' by late 2001 but to no avail. A Summit could not be held during this three-year period and the 11th SAARC Summit took place in January 2002 in Kathmandu. In this summit, a decision was taken to have the SAFTA Treaty ready by the 12th SAARC Summit. The SAARC Secretariat coordinated the work of the commerce ministries of the respective SAARC member countries in preparing the SAFTA agreement. Meanwhile, the 4th round of SAPTA negotiations took place in October 2002. The four rounds of SAPTA had resulted in coverage of over 5,000 tariff line items (SAARC, 2002). Studies have shown that the SAPTA process contributed very little in stimulating intra-regional trade (Mukherji, 2002, SACEPS, 2002a, and others). Due to the slow progress of the regional initiative of promoting trade, a number of SAARC member countries decided to embark on bilateral free trade agreements (BFTA). The Indo-Lanka BFTA was signed in late 1998 and came into operation in early 2000. Long existing Indo-Nepal treaties were formalised as a BFTA in 1996 (RIS, 2004: 53). A number of other sub-regional initiatives such as growth quadrangles (Bangladesh, Bhutan, Nepal and India) and triangles (Sri Lanka, Maldives, South India) were mooted and some of them were initiated. These sub-regional initiatives were not considered for preferential trading but for sectoral cooperation. In addition, several South Asian countries joined wider regional groupings in Asia such as the Indian Ocean Rim Association for Regional Cooperation (IOR-ARC initiated in 1997) and BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation initiated in 1997). Both these groupings were not preferential trading blocs- IOR-ARC was based on open regionalism where unilateral trade liberalisation was advocated, while BIMSTEC was initially based on sectoral cooperation. Membership in such pan-Asian regional groupings was obtained by some South Asian countries in the hope of gaining more economic benefits, which the SAPTA process was not delivering.

learly, the SAFTA agreement has come at a time when the trading environment in South Asia is complicated by the slow progress of SAPTA and a number of parallel regional and pan-regional initiatives are in place. It would, therefore, be pertinent to examine whether the SAFTA agreement has taken into account the factors governing the slow progress of SAPTA and the complications created by

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parallel initiatives.

he SAPTA framework was basically guided by the 'positive list' approach, though there were instances where sectoral tariff preferences were considered between member countries2. The process adopted by SAPTA was extremely time consuming and slow. Moreover, at least in the first two rounds of SAPTA, non-tariff barriers (NTBs) were not considered for removal with the granting of tariff preferences. In a nutshell, besides these problems: (1) the tariff cuts were not deep enough, (2) a wide range of goods was not subject to preferential tariffs and (3) some actively traded goods were left out from preferential tariffs. These problems were visible in the first preferential trading arrangement in Asia, i.e., the Bangkok Agreement (BA) and were highlighted before SAPTA came into operation but the same mistakes were repeated3.

III. SAFTA Treaty and the GEP Report Jean Monet spoke of European integration in the 1950s and some ridiculed him as a dreamer at that time. However, Monet's dream was realised in a 40-45 years' time period. Likewise, some commentators have expressed various reservations on the GEP vision of a South Asian Economic Union by 2020. However, it is not an impossibility as the realisation of the European Union clearly indicates.4 The GEP Report on 'SAARC Vision Beyond the Year 2000' still awaits adoption by the SAARC Council of Ministers. This is in contrast to other regional groupings such as APEC, where their GEP Report was adopted and put into practice soon after its submission. The SAARC GEP Report has many suggestions, and with regard to movement towards a free trade area, the report, after taking cognizance of the problems encountered by SAPTA, recommended a 'negative list' approach for tariff reduction with an annual 12.5 per cent tariff reduction by member states, removal of all NTBs within a time frame, and a number of other trade facilitating policies. The SAFTA agreement is a far cry from the recommendations of the GEP Report. The tariff reduction process, timetable, additional measures (or direct trade measures) etc., differ significantly from the GEP recommendations. Moreover, there are inherent shortcomings in the agreement.

any important items critical for the success of SAFTA are left for negotiations such as the rules of origin (Article 18), negative list, areas for technical assistance, etc. This could cause considerable delay and might make it difficult to have the SAFTA process fully operational by 01 January, 2006 (the declared date). It is stated in Article 07 that for non-least developed countries (non-LDCs) the existing tariffs should be reduced to 20 per cent in two years and thereafter in a five year period, tariffs should be reduced to 0 - 5 per cent (Sri Lanka is given a period of six years). Least developed countries (LDCs) should reduce their tariffs to 30 per cent in two years and thereafter should bring down the tariffs to 0-5 per cent within an eight year period. If however, tariffs are below 20 per cent for non-LDCs, it is stated that an annual 10 per cent reduction should be made for two years. And for LDCs, if tariffs are below 30 per cent it is stated that an annual 5 per cent reduction should be made for two years. There is a 10-year period commencing 01 January 2004 for the

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FTA to become fully operational. Once the existing tariffs are reduced in accordance with the above format and completed by 01 January 2006, the subsequent tariff reduction process is aimed at achieving 0-5 per cent tariff rates by the end of eight years for LDCs and by the end of six years for the non-LDCs. The non-LDCs (and LDCs) are encouraged to adopt reductions in equal annual instalments of not less than 15 per cent (and 10 per cent for LDCs) annually. The above format of tariff reduction is a substantial departure from what is recommended in the GEP Report and is somewhat close to what the SAARC Chamber of Commerce and Industry (SCCI) suggested5. The problem with this format of tariff reduction is that, despite reduction of average tariffs, distortions will prevail in the form of high tariffs in particular products in some countries. Perhaps it would have been more efficient if convergence was achieved before embarking on lowering tariffs further. In order to ensure that the benefits incur to all member countries, achieving convergence as in the case of the ASEAN-FTA is always better.

lthough Quantitative Restrictions (QRs) will be removed as soon as the tariff levels reach 0-5 per cent, it is not clear from Articles 06 & 07 (4 & 5) whether other NTBs will be removed with the QRs. Moreover, if the Treaty is going to strictly adhere to this method of removal of various NTBs, it will be difficult to exploit the full gains from various phases of tariff reductions, thus defeating the objective of preferential tariffs. There is no reference to a movement towards a Customs Union after the FTA in the SAFTA agreement- a key recommendation of the GEP Report6. Article 7.3 (a & b) refers to the negative list. It is stated that the number of products in the negative list shall be subject to a maximum ceiling that is mutually agreed upon among the member states and will be reviewed every four years. There is no deadline for determining the negative list and there is no format for phasing out the negative list over the years. All these issues seem to have been left for discussion by the SAFTA Ministerial Council established under Article 10. If the negative list becomes too long, the agreement may not become compatible with Article XXIV of GATT. In fact, SAPTA comes under the Enabling Clause of the GATT, which is considered by some commentators as non-serious in commitment for it to cover 'substantially all the trade' as stipulated in the GATT (Kelegama and Adhikari, 2002).

hen items critical for the success of an FTA are left for negotiation, the finalisation can get delayed. This was the case with the Indo-Sri Lanka BFTA where the negative list was open for negotiation. Consequently, it took nearly one year and two months for the agreement to become effective after it was signed. Various disagreements had to be sorted out before finalisation. The phasing out of the negative list could have been based on the ASEAN FTA model where there was a clear strategy with a tariff line classification based on an Inclusion List, Temporary Exclusion List, Sensitive List and a General Exception List for implementing a Common Effective Preferential Tariffs (Mukherji, 2002; SACEPS, 2002a). This dimension has been completely ignored in the SAFTA agreement.

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n addition to the differential tariff reduction format, the agreement makes a number of provisions for according special and differential treatment to the LDCs in the region (Article 11). There are provisions for non-LDCs considering direct trade measures in favour of the LDCs, such as long and medium-term contracts containing import and supply commitments in respect of specific products, buy-back arrangements, state trading operations and government procurement. LDCs will get special consideration for technical assistance, in particular, to compensate for revenue shortfalls from tariff reductions. These measures do not go far enough to ensure that LDCs will be able to derive equitable benefits from SAFTA. It was this concern that made Bangladesh hesitate till the last minute before signing the agreement. Bangladesh wanted non-LDCs to refrain from imposing anti-dumping and countervailing measures against LDCs, and rightly so, since no such provision exists in any other existing FTA. This concern was partially accommodated by stating: 'The Contracting States shall give special regard to the situation of LDCs when considering application of anti-dumping and countervailing measures'. [Article 11 (a)] The agreement does not consider the suggestion of the GEP for creation of a large fund for development of infrastructure, human resources and improvement of export supply capacity of LDCs. Without significant structural changes in the production structure, LDCs are unlikely to derive equitable benefits from SAFTA. SACEPS (2002a) has shown that in the EU for raising the level of development in the less developed member countries such as Spain, Portugal and Ireland, the European Commission had created a development fund for each of them amounting to 3- 5 per cent of their GDP. Such arrangements have not been considered in the agreement, perhaps due to reservations expressed by non-LDC member countries. It would be imperative to ask at this juncture why many SAARC members shy away from preferential tariff reduction. The first reason is rigid factor markets- in particular, labour and capital- prevalent in most SAARC member countries. These factors of production find it difficult to move out due to tight legislation governing them when the industries are subject to restructuring as result of tariff liberalisation.7 Consequently, instead of industry restructuring, what takes place is closing-down of industries with serious social and political consequences8. This is an issue for economies where the small and medium scale enterprises dominate the industrial and agricultural sectors in terms of employment. Thus, considerable structural adjustments also have to take place, particularly in LDCs to face tariff reforms with a greater degree of confidence.

econd, there is a fear among the smaller countries that the main beneficiary from tariff liberalisation would be the larger countries9. Irrespective of the theoretical viewpoint10, the perception of smaller countries needs to be recognised, and it was this realisation that led to the 'Gujral Doctrine' to be introduced by India in 1997/98. However, there is some dilution of the doctrine in recent years and giving vent to this, an editorial of the Economic and Political Weekly (EPW) stated: 'It is for India to ensure that smaller members of the region have a growing stake in regionalism â&#x20AC;Ś. This responsibility India has not taken seriously'. (EPW, January 10-16, 2004: 119)

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To reduce the cost of structural adjustment, 'additional measures' are required. Additional measures in Article 8 do not measure up to the GEP report, where reference has been made for an establishment of a South Asian Development Bank, South Asian Development Fund and a South Asian Energy Grid. The GEP report has strongly recommended the creation of a SAARC Investment Area and vertical industrial integration. None of these receive mention in the agreement and it does not provide for creation of a mechanism for pursuing additional measures under Article 811. There is a sizeable body of literature on South Asia Energy Grid (SACEPS, 2002b; RIS, 2002; and others). A SAARC Investment area has also been looked at in recent literature (SACEPS, 2002c; RIS, 2002; and others). In fact, the trade-investment nexus has come into effective operation in South Asian bilateral FTAs and RIS (2004) shows how the large trade deficits between two countries have been compensated by the capital account through significant investment flows. In the context of investment flows, horizontal and vertical integration of industries of South Asia becomes important to face the global competitive pressures12. Even though a multitude of literature is available on these crucial issues, the agreement has completely overlooked these areas and solely focused on trade facilitating measures in Article 8.

inally, the agreement is silent on how SAFTA is going to integrate the existing bilateral free trade agreements between some SAARC countries (such as the Indo-Lanka BFTA, Indo-Nepal BFTA, and the ones that are under consideration, for example, Pakistan-Sri Lanka BFTA and Indo-Bangladesh BFTA) into the SAFTA agreement. If integration is not an option, will SAFTA operate parallel to the existing treaties?. This seems to be most likely and will create a 'Spaghetti Bowl' type of phenomenon (a la Bhagwati, 2002) with parallel preferential tariffs, rules of origin and negative lists13. Thus the Customs and Commerce Departments in individual SAARC countries will have to be upgraded to meet this challenge. Since trading in SAARC basically means to trading with India, this objective seems to have been met in the current trading environment by bilateral FTAs. Thus, SAFTA will basically boil down to trading between India and Pakistan. If the remaining bilateral FTA with India, viz., Indo-Bangladesh comes into operation soon, there are reasons to believe that there will be less enthusiasm among some SAARC countries about SAFTA.

he SAFTA agreement does not refer to liberalisation of trade in services. A regional trade arrangement should not only be deepened but widened as well. For example, the Indo-Sri Lanka BFTA has now been advanced to an Indo-Lanka Comprehensive Economic Partnership Agreement where liberalisation of services (in addition to investment) has been included. The BIMSTEC Free Trade Area that was signed in early February 2004 refers to liberalisation of services under a GATS-Plus framework in Article 4. In short, the SAFTA agreement is not futuristic14.

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The above-mentioned technical shortcomings are obviously going to get aggravated by regional politics. Much will depend on whether Pakistan would offer MFN status to India in 200415. Present indications are that there is a commitment to a peaceful settlement of the long-standing bilateral dispute between India and Pakistan. However, if the MFN issue between the two nations is not settled soon, it will be a major obstacle to the birth of SAFTA.

he Indian Prime Minister stated in 2003 that South Asia should move towards a common currency. Obviously this would be possible if there is monetary cooperation among South Asian countries. Currently, under SAARCFINANCE a discussion on monetary cooperation is ongoing. Moreover, literature on the subject is also on the increase (Maskey, 2002; RIS, 2004; and others). RIS (2004), for instance, has suggested the introduction of a parallel currency as the first step towards moving to a common currency. The subject did not receive any attention from the 12th SAARC Summit. It appears that the futuristic proposals have been set aside in order to cover the backlog that has accumulated due to the frequent postponement of SAARC Summits.

IV. Concluding Remarks Whether regional trade is the best available option for South Asia has been a subject of debate since the mid-1990s. Critics of promoting regional trade in South Asia via preferences have argued that South Asia would be better off focusing on trade with the rest of the world, in particular, EU and USA (Srinivasan, 1994; Pigato et al., 1997; Panagariya, 1999; and others). A recent report released by the World Bank (2003) argues: 'Because many tariffs in the region are very high, especially in India and Bangladesh, there are large potential trade diversion costs for the region as a whole if the various preferential trade agreements were ever to be seriously implemented. The consequent reductions in economic welfare would show up principally in reduced customs revenue and terms-of-trade losses. It is unlikely that benefits through increased competition, economies of scale, or improved operating efficiency of import competing firms would outweigh these overall economic costs. There are much larger gains for increased trade with the rest of the world (ROW), especially trade with the developed countries and with more advanced developing countries in South East Asia, including China. This is because the South Asian countries have a comparative advantage in relation to ROW in similar, mostly labour intensive products, and the volume of trade and the economic benefits from trading these products among themselves are limited by comparison.' (p. 22)

n the other hand, those who argue the case for regional trade state that substantial trade is already taking place in South Asia with informal trade amounting to a large proportion of formal trade. The exact intra-regional trade is estimated anywhere between 8-10 per cent. Although studies have shown that there are limited complementarities in the SAARC region, it is argued that this was also the case in ASEAN during the mid-1970s, and that dormant complementarities in the region could be invigorated by intra-regional investment and FDI16. They also argue the cost of non-cooperation to be quite high (RIS, 2004 and 1999; GEP, 1998; CUTS,

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1996; and others). The debate is far from settled. Irrespective of the debate, there is a general belief that regional cooperation in South Asia should not be viewed only from the trade perspective, and that there are many gains from regionalism in other areas.

he past decade has seen the emergence of a number of regional trading blocs in different parts of the world and data shows that nearly 60 per cent of world trade is now conducted on preferential basis. The countries that are not part of a trade bloc face the risk of discrimination of their exports and loss of competitiveness. Thus, in the light of global trends, irrespective of the pros and cons of the academic debate, South Asia has been pushed to adopt regional economic integration. In the SAARC, promoting intra-regional trade is part of a large package of economic cooperation and SAFTA is a part and parcel of South Asian Economic Cooperation. However, the movement to SAFTA is taking place in an environment where: (1) the precursor to SAFTA, i.e., the four rounds of SAPTA have failed to show concrete results, (2) several bilateral FTAs are well entrenched in the South Asian trading system, and (3) South Asian tariffs are already coming down under World Bank/IMF structural adjustment programmes. The third factor in effect is automatically reducing the preferential margin. Moreover, there are a number of shortcomings, clauses open for interpretation and items for further negotiations in the SAFTA agreement This shows that most of the research work that was done by the SAARC second-track 'think tanks' has not been fed in effectively to the SAARC first-track or the official process17.

iven this situation, not much can be expected from SAFTA. The initial euphoria that comes with the signing of the SAFTA agreement will soon taper away. The realities and the geo-politics of the region will once again determine the pace of negotiations in SAFTA. By that time, the bilateral FTAs would have delivered most of the results for the smaller South Asian countries and SAFTA will be an agreement mainly to promote India-Pakistan trade. Is it due to this realisation that the SAFTA agreement did not bother about a vision and ignored a number of worthy suggestions of the GEP Report? (Dr Saman Kelegama is the Executive Director, Institute of Policy Studies of Sri Lanka).

End Notes 1. 2. 3.

5. 6.

Kargil conflict and subsequent military standoff. In the third round, sectoral tariff preferences were exchanged between India and Bangladesh (SACEPS, 2002a). It was highlighted that the Bangkok Agreement failed to be an effective preferential agreement due to such shortcomings and SAPTA should take due caution of this (Kelegama, 1996). The GEP report is taken as a reference point in this paper in the absence of any other document on the vision for South Asia. For a critique on the GEP Report, see, for instance, Jayasekera (2001). See Mukherji (2002:93). Sometimes the movement to a Customs Union may be a problem due to political economy factors. When this is the case, member states could consider alternative routes to deepen

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7. 8.

9. 10.

11. 12. 13.

14. 15. 16.

17.

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economic integration, such as working out a Comprehensive Economic Partnership Agreement (CEPA). The Indo-Sri Lanka BFTA currently is considering such an approach to deepen economic integration (see, for instance, Kelegama, 2003). SAFTA can always explore new paths for deepening integration if a Customs Union is not feasible. Sometimes when institutions are not in place to support restructuring, the process becomes more complicated. It is acknowledged that some inefficient industries have to close down if they are not competitive. However, even potentially competitive industries close down due to unfriendly factor markets. A discussion on this is available in Kelegama (1999). RIS (2002), for instance, has argued that it is the small countries that would benefit most from trade liberalisation; however, the debate is far from settled (Weerakoon and Wijayasiri, 2001). Some items get mentioned in the Declaration of the 12th SAARC Summit. RIS (2004) provides an excellent example of how horizontal and vertical integration could take place in industries of the region by taking the case of the textiles and garment sector. For example, Sri Lanka can export cloves under preferential tariffs to India under the Bangkok Agreement, SAPTA and the Indo-Sri Lanka BFTA. In the near future, it will also have the privilege of exporting cloves to India under the BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation) FTA. It is only in the 12th SAARC Summit Declaration that reference is vaguely made to a future Customs Union and thereafter a South Asian Economic Union. India granted MFN status to Pakistan in 1995 but the latter has been reluctant to reciprocate and has linked the trade settlement to the Kashmir dispute. Intra-regional trade in ASEAN was close to 6 per cent in the mid-1970s, but now has increased to around 23 per cent. ASEAN too was characterised by limited complementarities at the beginning but the situation changed with preferential trading, FDI and intra-regional investment (SACEPS, 2002a). For details on limited complementarities in SARRC, see Din and Qadir (2004). SACEPS (2002a) report, where many of the problems associated with the movement to SAFTA were identified, was submitted to all the Foreign Ministries of SAARC member countries before the 12th SAARC Summit. In fact, all of them received copies in early 2003. However, none of the recommendations given to address the problems in the report seem to have been taken into account.

Bibliography

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Perspective', South Asian Survey, vol. 6, no. 2 1999. l S. Kelegama, 'SAPTA and its Future', South Asian Survey, vol. 3, nos. 1 and 2 1996. l N.M. Maskey, 'South Asian Monetary Integration in Light of the Optimum Currency Area

Criterion of Pattern of Shocks,' South Asia Economic Journal, vol. 2, no. 2, 2001. l I.N Mukherji, 'Charting a Free Trade Area in South Asia: Instruments and Modalities', in

T.N. Srinivasan (ed.), Trade, Finance, and Investment in South Asia, (New Delhi: Social Science Press, 2002). l A. Panagariya, 'Trade Policy in South Asia: Recent Liberalisation and Future Agenda', The World Economy, June 1999. l M. Pigato, et al. (1997), South Asia's Integration into the World Economy, (Washington, D.C.: The World Bank, 1997). l RIS, South Asia Development and Cooperation Report 2004, Research and Information System for Non-Aligned and Other Developing Countries, New Delhi, India 2004. l RIS, South Asia Development and Cooperation Report 2001/02, Research and Information System for Non-Aligned and Other Developing Countries, New Delhi, India 2002. l RIS, SAARC Survey of Development and Cooperation 1998/99, Research and Information System for Non-Aligned and Other Developing Countries, New Delhi, India 1999. l SAARC, 'Regional Economic Cooperation Initiatives within the SAARC Region' and 'A Brief on SAARC', (Kathmandu: SAARC Secretariat, 2000). l SACEPS , SACEPS Task Force Report on SAFTA, South Asia Centre for Policy Studies (SACEPS), Dhaka, Bangladesh, (2002a). l SACEPS , SACEPS Task Force Report on South Asian Investment Cooperation, SACEPS, Dhaka, Bangladesh, (2002b). l SACEPS , SACEPS Task Force Report on Energy Cooperation in South Asia, SACEPS, Dhaka, Bangladesh, (2002c). l T.N. Srinivasan, 'Regional Trading Arrangements and Beyond: Exploring Some Options for South Asia Theory, Empirics, and Policy', Report no. IDP-142, South Asia Region, (Washington, D.C: The World Bank, 1994). l D. Weerakoon and J. Wijayasiri, 'Regional Economic Cooperation in South Asia: A Sri Lankan Perspective', International Economic Series, no. 6, (Colombo: Institute of Policy Studies 2001). l World Bank, 'Trade Policies in South Asia: An Overview', Poverty Reduction and Economic Management, South Asia Region, (Washington, D.C: The World Bank, May 2003).

J. Bhagwati, Free Trade Today, (New Delhi: Oxford University Press, India 2002). l l CUTS, 'Cost of Non-Cooperation to Consumers in the SAARC Countries: An Illustrative Study', Working Paper, Consumer Utility Trust Society, Jaipur, India 1996. and U. Qadir, 'Revealed Comparative Advantage and Trade Complementarity in South Asia', South Asia Economic Journal, vol. 5, no. 2 (2004 forthcoming). l EPG, The Report of the SAARC Group of Eminent Persons, SAARC Secretariat, Kathmandu 1998. l IPS, Sri Lanka: State of the Economy 1999, (Colombo: Institute of Policy Studies, 1999). l D. Jayasekera, 'GEP Report: Critical Evaluation of Economic Aspects' in S. Kelegama, (ed.), Impediments to Regional Economic Cooperation in South Asia, (Colombo: CASAC/FES/IPS publication, 2001). l S. Kelegama, 'Sri Lankan Exports to India: Impact of Free Trade Agreement', Economic and Political Weekly, vol. XXXVIII, no. 30, July 26-August 1, 2003. l S. Kelegama and R. Adhikari, 'Regional Integration in the WTO Era: South Asia at Crossroads', SAWTEE/CUTS-CITEE Discussion Paper, SAWTEE, Kathmandu, Nepal 2002. l S. Kelegama, 'SAARC From Association to Community: A Small Country Economic l Musleh-uddin

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Aid, Governance and Ownership Professor Rehman Sobhan

Changing Trends in ODA For many years, beginning from the 1950s, South Asia was the poster-child of foreign aid, known also as Official Development Assistance (ODA), offered by the Advanced Industrial Countries (AIC) as well as the Communist countries to the developing world. South Asia was seen as the first battleground of the cold war for the hearts and souls of the Third World. India and China were projected as the symbolic protagonists of this epic struggle between democracy and communism and foreign aid was seen as the currency which could influence the course of this struggle. In the halcyon days of foreign aid in the 1960s, posters of earnest young Peace Corp workers- the children of the Kennedy era of an idealistic United States- vaccinating impoverished Pakistanis or teaching school to earnest Indian villagers were part of the popular image of foreign aid. U.S. food surpluses distributed as aid under the PL480 programme were expected to remove hunger and provide jobs to the rural unemployed through various public works programmes. It was believed that aid, wisely invested in building power stations, roads, bridges, schools, hospitals, even industries, would banish poverty from South Asia, and help to sustain the democratic project. Five Year Plans were seen as the appropriate vehicle for absorbing and programming foreign aid because the planners could model the two resource gaps of savings/investment and foreign exchange which were seen as the principal constraints to economic growth in developing countries.

uch aid has since been invested in South Asia over the last four decades. Between 1980 and 2001, US$ 17 billion has flown into South Asia as ODA. However, in recent years, aid flows into this region have been exposed to steady decline in both absolute and relative terms. Table I shows that ODA inflows per capita as well as a % of GDP declined between 1990 and 2001. This decline was registered in all countries of the region, except Pakistan. The share of aid flowing to South Asia as a proportion of total ODA also declined from 18.5 per cent in 1980, to 12.6 per cent in 1990 and, eventually, 11.7 per cent in 2001. In real terms total aid received in 2001 was discernibly less than in 1980. The only country which enjoyed an increase in aid in recent years has been Pakistan which led to an increase in per capita inflows in 2001 compared to 1990 as well as in the ODA/GDP ratio. As we will discuss later, Pakistan's unique experience derived largely from its changed strategic circumstances in the wake of the war in Afghanistan. As a consequence of this restructuring of global aid flows, South Asia has become increasingly less dependent on aid in relation to its development process. Some

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countries, such as India and Pakistan, have been conspicuous in their resort to private capital inflows to compensate for the decline in ODA. Table 1 also shows the changing composition of external capital inflows and the declining shares of aid in relation to underwriting total capital inflows. India is now for all practical purposes no longer an aid recipient, even though in 2001, it did receive US$1.7 billion in ODA. This amounts to 0.4 of its GDP and a small part of its total public expenditure. A great part of this aid inflow to India comes in the form of non-concessional loans from multilateral financial institutions.

outh Asia's reduced dependence on aid owes in large measure to its robust export performance in the area of goods and services since the 1990s. However, this export boom, particularly in the area of goods, has been heavily concentrated in North America and the European Union, and for countries other than India, on a narrow range of items such as textiles and ready-made garments or tourism. This has opened up new sources of dependency and erosion over policy autonomy.

Changing Donor Perspectives The decline in aid inflows into South Asia is reflected in the changing perspective of aid donors to the development discourse which underlies donor-recipient relations. The principal aid donors to South Asia, led by the World Bank, have begun to change both the composition of their aid and also the underlying policy advise associated with such aid. In South Asia, ODA flows had traditionally been heavily concentrated in the more capital intensive areas of physical infrastructure such as energy, transport and communications and even industry. Until the mid-1980s, multilateral institutions such as the World Bank and Asian Development Bank were the principal financers for infrastructure projects and were even financing investment in state owned enterprises. Bilateral donors such as U.K., Federal Republic of Germany (FRG) and Japan were particularly active in financing investments in the power, transport and communications sectors. In the 1960s the World Bank was the principal financer of the state owned Ghorasal Fertilizer Factory in Bangladesh and in the 1970s the ADB was the principal investor in the Ashugonj Fertilizer factory. In the 1960s and 70s, bilateral donors were particularly active in financing public sector investments in the industrial sector. The U.K. and FRG pioneered public investment in the steel sector in India which was matched by the USSR investments in the steel sector as well as a broad range of SOEs in India and Pakistan, including what is now Bangladesh. The USSR finance for the steel mill in Karachi in the late 1960s was one of the biggest projects of its kind in Pakistan. These investments in capital intensive, highly visible public projects, provided tangible evidence of donor realpolitik in the 'great game' in South Asia.

he changing composition of ODA coming into South Asia in the 1980s and 90s reflected the growing influence of ideology over realpolitik in the aid practice of both bilateral and multilateral donors and its intrusion into their aid priorities. While the U.S. was always reluctant to invest in public sector industry, it continued to support infrastructure projects and was one of the principal financiers of the Rural Electrification Project in Bangladesh beginning in the late 1970s. Although the

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principal aid donors to South Asia were never averse to using the leverage provided by their aid to influence the political complexion of regimes, their aid leverage in the last two decades was mostly directed to influencing policy choices, at least in South Asia.

he change in the policy regime and direction of aid to South Asia in the 1980s reflected the growing disillusion with the effectiveness of aid not just to South Asia but to most of the developing world. By the end of the 1970s it was increasingly believed in the AICs that the massive aid flows to South Asia in the last two decades had neither alleviated poverty nor generated sustained economic growth. This disillusion with aid originated from among the tax payers of these aid giving countries as much as from the particularist constituencies of the 'right' and 'left' who questioned the quality of aid effectiveness. In the AICs, the resistance to a rising tax burden was growing and tax payers were particularly incensed that their taxes may end up in developing countries to be dissipated in wasteful public expenditures permeated with corruption. The juxtaposition of persistent poverty with the growing affluence of a narrow elite in the developing world enabled tax payers to join hands with aid critics in questioning the efficacy of aid. Within the developing world the costs of aid dependence were being recognised and the hegemonic influence of aid donors on the policy discourse of aid dependent countries was being challenged. Academic work on the limitations of aid in stimulating development was very much in evidence.

s the cold war drew to its conclusion, it was no longer acceptable for once strategically favoured states to go on misusing aid with impunity. The main challenge to the sustainability of aid budgets came from the disillusion of tax payers in the North who questioned the complicity of the aid agencies in the donor countries in contributing to this misdirection as well as misuse of aid and their collusive role in building up a class of people who prospered from aid at the expense of the majority of the citizens in developing countries (DCs). The response of aid agencies in the AICs to this rising sense of outrage in the donor countries was thus driven both by the expectation that this disillusionment with aid could be reversed as well as by their compulsions for institutional survival. Aid agencies, seeking to protect their budgets focussed on two themes in seeking to redesign aid strategies: (i) (ii)

Getting policies right. Redirecting aid to the poor.

The second part was, however, largely subordinated to the first because it was believed by the dominant aid donors through the decade of the 1980s that the right policies would stimulate growth which in turn would alleviate poverty. In order to get policies right, aid was increasingly offered on conditional terms that policy reforms, on lines suggested by the donors, would be put in place in the respective developing countries (DCs). This agenda for policy reform was, in turn, heavily influenced by the ideological input emanating from the Reagan and Thatcher administrations which underwrote the so called Washington Consensus. In country after country, the World Bank and IMF, known collectively as the Bretton Woods institutions (BWI), put in place stabilisation programmes followed by a package of structural adjustment reforms (SAR) inspired by the Washington Consensus.

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t was, with some distinguished exceptions- in the DCs and the transitional economies (TEs)- the apparent failure of the aid driven reforms of the 1980s to either promote sustained growth or alleviate poverty which has now inspired a further change of direction in donor aid strategies. The sense of frustration amongst the taxpayers of the North had by now extended from the `right' to the `left' led by the NGOs, radical academics and church groups. The critics projected the 1980s as an era of failed reforms, which not only did not improve growth but made a small fraction of these Third World countries very rich whilst the poor remained poor. The `right' continued to challenge the very assumptions of aid and remained unimpressed by the decade of reforms initiated in many developing countries under the leadership of the World Bank and IMF.

Putting Governance First To cope with critics from both the 'left' and 'right' the new focus on aid strategy in South Asia appears to be directed to the establishment of good governance and targetting aid to the poor through what James Wolfensohn, the incumbent President of the World Bank, termed the challenge of inclusion. The literature of the World Bank in the 1990s indicated that the World Bank, at least, had recognised that a combination of getting policies and governance right was likely to alleviate poverty. The World Bank's widely discussed empirical work on Assessing Aid claimed that 'with' sound country management, 1 per cent of GDP in assistance translates into 1 per cent decline in poverty. Thus, it stated that a US$ 10 billion increase in aid would lift 25 million people a year out of poverty- but only if it favours countries with sound economic management. By contrast, the Bank paper argued that an across the board increase of US$ 10 billion would lift only 7 million out of their hand to mouth existence if economic management was weak. This World Bank study further argued that 'improvements in economic institutions and policies in the developing world are the key to a quantum leap in poverty reduction'. Such effective use of aid is also seen to complement private investment. Promoting aid effectiveness thus demanded the use of aid in strengthening institutions as well as policies and bringing about an active engagement of civil society in the design and delivery of aid. These conclusions of the World Bank study are apparently derived from intensive empirical work on aid effectiveness based on reviewing a large sample of DCs and aid projects.

he original paper on Assessing Aid contained a number of serious flaws in the assumptions as well as design of the analytical model used in the study whilst their empirical evidence merited more careful scrutiny. The original definition of sound management incorporated a mix of three policies: reducing the budget surplus as well as the rate of inflation and realising increased trade openness. These reforms were packaged with institutional quality which was defined as an admixture of strength of the rule of law, quality of the public bureaucracy and pervasiveness of corruption. It would be necessary to examine the metric for such abstract concepts as rule of law and bureaucratic quality before assessing the weights assigned to these four variables and three sub-variables of institutional quality. Such an exercise would

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permit a fuller appreciation of the empirical work correlating GDP growth with economic policy and institutional quality. It will, however, be argued that the available evidence from the South Asian experience does not conclusively support the conclusions of the World Bank study on the role of governance.

otwithstanding its technical limitations, the World Bank study on Assessing Aid was an important document. Its currency and extent of analysis on aid effectiveness and the attempt to use empirical evidence to question the efficacy of a decade of donor driven policy reforms underwritten by conditional offers of ODA, made it a landmark document. The study appears to reflect a willingness of the World Bank to encourage a more endogenous process of promoting policy reforms within not just South Asia but also in the Third World. This rethinking in the World Bank was further reaffirmed by a series of conferences organised by the World Bank around the world to address the issue of policy ownership as a critical ingredient in any move to promote better governance. The emphasis by the World Bank on prioritising poverty was highlighted in their World Development Report (WDR) of 2001 whilst the role of institutions was highlighted in the WDR of 2002.

his rethinking of aid policy was not limited to the World Bank. Other aid donors such as the OECD, the U.K., Canada, the Nordics countries, and the Netherlands also sought to link good governance with aid effectiveness and argued that policy ownership was crucial to the exercise of effective governance over development policy in the developing countries. All such agendas to promote governance reform focused on the need to prioritise the poor in the donor's allocative regimes. Such poverty alleviating agendas are now increasingly concerned with issues of empowerment of the poor and of women as integeral to the process of poverty alleviation.

Contradictions in the World Bank's New Aid Strategy Bank programmes designed in an era when growth was prioritised over poverty have not quite worked out how poverty alleviation could be integrated into the earlier generation of structural adjustment reforms (SAR) programmes. The belief of the 1980s that high growth will reduce poverty may be something of a truism. However, the earlier reforms neither generated sustained growth nor alleviated poverty so that a new development model to reconcile growth with poverty alleviation is still awaited. The current practice of simply adding on poverty related projects to the old adjustment model appears to be a self-defeating exercise. If the original development design was itself perpetuating poverty, accentuating inequalities and empowering a small elite who use their wealth to monopolise state power, a few so- called poverty centred projects will not ensure a sustainable assault on poverty or the empowerment of the poor. Prioritisation of poverty in the aid agenda thus demands that the original design of the reform process has to incorporate institutional mechanisms for ensuring inclusion of the poor in the development process, giving them competitive access to the market and institutionalised claims on resources, and scope for participating in political power. Attempts to step up allocations for the poor through targetted aid is hardly likely to disturb the realities of power in most DCs and transitional economies. Serious contradictions also appear to arise between the prioritisation of governance in

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aid agendas and the BWI commitment to policy lending. The distorting impact of policy lending derives from its impact on policy ownership as well as the limited access of the poor to the benefits of such reforms. It has been recognised by all donors from the World Bank to the OECD studies, that reforms without ownership have proved to be unsustainable.

his failure to address the structural sources of poverty and the compulsion to adhere to the macro-economic policy model associated with the World Bank's structural adjustment reforms (SAR) has now been internalised in the Poverty Reduction Strategy Papers (PRSP) adapted by Bangladesh, Nepal, Pakistan and Sri Lanka, under pressure from the World Bank and IMF. This design failure in the PRSPs reflects the weak ownership of the South Asian governments over the current new policy fashion of the donors. It would thus appear that the newthink on aid and its manifestation in the PRSP process has not really resolved the tension between the flawed policy design of the original structural adjustment reforms model and the Bank's new commitment to putting poverty and governance first. The World Bank has in fact not succeeded in developing a coherent macro-model which links such reforms with the process of poverty eradication. Nor is there any indication that policy ownership in the DCs is being more actively promoted rather than talked about. This weakness in the PRSP process has now intruded into the report of the Independent South Asian Commission on Poverty Alleviation (ISACPA) which was approved by the SAARC Summit in Islamabad in January 2004. This report is a useful document but is essentially astructural in its conception and is thus likely to have a minimal impact on poverty in South Asia.

ll such arguments about the counter-productive nature of donor driven policy reforms have been part of the critique of foreign aid and external dependence for at least two decades and particularly during the high tide of adjustment reforms in the 1980s. For the academics, NGOs and some political parties who had been challenging the donor driven reform process of the 1980s, it is welcome news that the World Bank has seen the light. Empirical research is now deployed by the Bank to demonstrate that lack of policy ownership contributes to the failure of reforms. They could have learnt as much by a careful reading of writings on the subject published in the 1980s.

A South Asian Perspective Sound economic policies The available evidence from South Asia indicates that by the standards set by the World Bank, the region's policy regimes remains reasonably sound. Between 19972003, the South Asian countries had, by DC standards, lower fiscal deficit/GDP ratios which on average remained below 10 per cent. The deficits, in South Asia, where they persisted, were designed to accomodate inflows of aid. These budget deficits were not the result of governmental extravagance but part of a structural problem originating in the process of aid dependency. To draw any conclusion, at least within South Asia, about the relative policy merits of the fiscal deficit/GDP ratio would thus appear to be misleading. All South Asian countries have, again by global DC standards, enjoyed

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relatively low rates of inflation, mostly in single digits. Donors could, thus, not fault the region's policymakers on monetary profligacy.

rade openness as a measure of policy, has also shown considerable improvement in South Asia, though the region still has some way to go to match the East and South East Asian experience. It is argued that the extent of openness in East Asia is open to question. The covert protectionism practiced by Republic of Korea in the dynamic phase of its growth persisted until well into the 1980s and continues to be practiced today in Japan. It is argued that a policy of domestic protection appears to have co-existed with considerable policy support for exports throughout the decades of high export growth in several East Asian countries from 1965 to 1985. Many of these export promotion measures through the 1960s and 1970s were not very consistent with the tenets of economic liberalisation and would be deemed today as unacceptable by the WTO. Even the South East Asians protected some key parts of their economy and nurtured these for entry into the export market, as for example the case of the Proton car in Malaysia. China and Vietnam, who have been enjoying high rates of GDP and export growth over the last 15 years, for all their reforms, remain even today the most protected economies in South Asia. Conversely, Bangladesh, Sri Lanka and Nepal's opening up of the economy has not yet yielded the benefits promised by economic reformers. These arguments could be applied even more strongly to Sub-Saharan Africa (SSA) where many countries have liberalised their import regimes at the cost of a deterioration in domestic industry and the ushering in of a process of de-industrialisation. It is thus arguable that open economic policies may be a necessary, but far from sufficient, condition to stimulate growth. The correlation between policy and outcomes needs to be made country specific if we are to draw any policy conclusions as has been the practise in the World Bank's report on Assessing Aid.

Measures of institutional quality The link between institutional quality and growth in South Asia is far more problematic. Measuring the strength of the rule of law is as difficult as the comparative measure of corruption, introduced by Transparency International (TI). It is thus difficult to assess whether, for example, the rule of law in Thailand was better established than in Bangladesh or Pakistan, in order to explain their consistently higher growth rates. No doubt what passes for the rule of law was more in evidence in India than in Zaire. But for this proposition to hold good it must also explain differential performance within South Asia itself.

s far as corruption is concerned, there is no evidence at hand which would indicate that Indonesia was more or less corrupt than Bangladesh or Pakistan. Indeed countries such as Bangladesh, Pakistan and Nepal, which rank quite unfavourably in the lists of Transparency International, have on average performed better in the last 5 years than many developing countries (DCs). It is by no means conclusive from the evidence provided by Transparency International that South Asia is conspicuously more corrupt than Sub-Saharan Africa or even Indonesia.

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s far as a comparative assessment of bureaucratic quality is concerned, it is not clear what measures are used for this by the Bank. Again, it would be difficult to argue that India or Sri Lanka's bureaucracy is less competent than that of Thailand, Indonesia, China or Vietnam as to qualifications, systems of recruitment and career advancement. Bureaucratic quality thus appears to be measured by economic performance and can hardly serve as an explanatory variable for this economic performance. It could thus be argued that the South Asian bureaucracy, compared to that in Francofone Africa, may, on anecdotal evidence, look more meritorious but within South Asia the application of these measures in assessing economic performance would need to be much more sensitively analysed to permit for any conclusions to be drawn. The East Asian crisis of 1997 suggested that many of the features of weak governance once associated with South Asia such as corruption, crony-ism, political patronisation, lack of transparency, lack of rule of law, personalised regulatory practices, were in existence in East Asia and are only today being identified as explanations for their financial crisis. But these flaws in governance were also present in the East Asian system during its miracle phase when few donors sought to highlight these as constraints to their economic performance. It would thus appear that whilst the World Bank's position on the value of sound governance appears to be intuitively acceptable more robust evidence, within Asia at least, needs to be generated before we can use these measures as a yardstick for guiding aid policy. The follow up arguments posed by the World Bank for reducing poverty thus also need to rest on more robust evidence establishing the causal link between sound economic management and policy success. Unfortunately, the conceptual link between governance and economic performance remains far from clear. In these circumstances, the recommendation that aid be targetted to low income countries with sound economic management appears to be sensible in principle but difficult to operationalise. Obviously China has fared much better than India whilst Vietnam has done better than Bangladesh in reducing poverty. But whether this owes to their policy and allocative priorities, their better economic management or stronger political commitment, remains again open to debate.

he World Bank study made the sensible point that experience shows that donor financing with strong conditionally but without strong domestic leadership and political support has generally failed to produce lasting change. This statement could certainly be written as an epitaph on the era of conditional aid offered to South Asia (excluding India). There is no evidence that any of these countries made strong political commitments to economic reforms or sought to build a political constituency behind their economic reforms. Even in India the strong commitment demonstrated by Dr. Manmohan Singh to economic reforms, when he took over as Finance Minister in 1991, was not fully endorsed by his Cabinet colleagues in the ruling Congress Party. Thus, the pace of his particular reforms visibly decelerated in the second part of the Congress regime as general elections approached in 1996. The approach of the successor BJP regime in India has faced its own ebbs and flows. The contestation

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between reform minded cabinet members such as their successive finance ministers or the minister in charge of privatisation and the more swadeshi school of thought remains unresolved.

Using aid to promote good governance The Bank's recommendation to direct aid to countries with a strong track record of concrete performance behind domestically initiated reform would thus again favour China and Vietnam over Bangladesh or Nepal. The Bank's recipe for dealing with countries with poor policies and no credible reform movement suggests a patient role of disseminating ideas, transmitting experiences of other countries, training future policymakers and leaders. This again is a paradoxical position. Poor policies and a credible reform movements defined by the Bank's yardstick could exclude China and Vietnam but include Sri Lanka or even Nepal who were very faithful adherents to structural adjustment reforms. Their poor outcome may thus originate in weak implementation. This has enabled the Bank to now pass on the responsibility of poor performance in South Asia not to any design flaw in the structural adjustment reforms but to poor governance which remains the responsibility of the host government.

Endogenising policy reforms Once the Bank and other donors embrace the proposition that reforms depend mainly on domestic political and social factors, the donors have to come to terms with the limited influence they can exercise over domestic policy agendas in South Asia. In the wake of this renovation in the Bank's approach to policy reforms, conditional lending would need to be phased out. The Bank again recognises that conditionality is unlikely to bring lasting reform if there is no strong domestic movement for change. Thus, only when domestic constituencies are committed to reform, adjustment loans and foreign aid can help consolidate policy gains. In such a context the donors can and indeed should do no more than suggest to the concerned governments that they need to get their act together, design reforms and commit themselves to the implementation of these reforms. Out of this reform process the need for aid can be articulated in a variety of areas from Technical Assistance (TA), to budget and balance of payments support offered for a finite period whilst revenue and export earnings capacities are built up.

hroughout South Asia, with perhaps the exception of Bhutan and Maldives, there is no country which lacks the domestic capacity to design its own reforms. This capacity must be mature enough to recognise where skill and knowledge gaps exist so that donor resources can be solicited to fund the necessary Technical Assistance. India has exercised ownership over their reforms and have articulated their own need for Technical Assistance which has, as a result, been much more effectively used than was the case of Technical Assistance imposed from without upon Bangladesh or Nepal. If donors are to recognise the need for policy ownership and the role of civil society in promoting this ownership there is not a great deal that they can do except react to such local initiatives.

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onors have, for too long, attempted to lead reforms. This often follows in the wake of slow progress by a country in designing its own policy reforms. The World Bank or UNDP tend to lose patience with such tardiness and prefer to call in expatriate consultants but with a facade of local participation added on. Donors thus also need patience and self-discipline. They should not make the mistake of promoting ownership which would itself be a contradiction in terms. The circumstances governing the assumption of local ownership will vary from region to region. South Asia is a region with the strongest potential for assuming ownership over its policy agendas. It has a longer democratic tradition than many other regimes but its roots constantly need fertilisation since persistent malgovernance endangers democratic institutions in most countries of the region. In India, Pakistan, Bangladesh, Nepal and Sri Lanka free elections have ended in periodic regime changes. But the working of parliamentary institutions leaves much to be desired and the recent lapse into authoritarian rule in Pakistan, Nepal and even Sri Lanka points to the shallowness of these roots. The press is relatively free and lends itself to extracting transparency from the government of the day. However long exposure to autocracy and a tradition of bureaucratic concealment leaves much scope for making public affairs more transparent. Both accountability and transparency need, however, to be extended to the private sector which tends to conceal a variety of misdeeds which are not exposed to the public or penalised in the market place because of their collusive association with the state and the imperfections of the market.

The role of civil society South Asia also has a highly pro-active civil society manifest not just in the profusion and quality of its NGOs, some of which are world famous, but in the growth of civic activism. Its professional resources are comparable to any in the Third World so that its capacity to design its own reform agendas waits on the will of the governments of South Asia to follow India's lead in reducing their dependence on donor advise and on the part of donors to practise what they preach over policy ownership. South Asia, outside India, has for two decades been innundated with expensive expatriate TA, usually of poor quality and with negligible use value due to lack of ownership.

he role of aid in moving South Asia towards better governance is thus likely to be minimal since in most of Asia, donors lack the leverage to do this. This has not prevented them from trying to influence not just economic policy but the promotion of transparency and even free elections in a variety of countries. In such a process, faced by recalcitrant governments, donors have sought to go over the head of governments to deal with civil society. Unfortunately civil society itself is an elusive concept. Donors, in search of civil society in South Asia, have often been tempted to use their aid to fabricate a civil society by using NGOs as a surrogate for civil society. This donor approach to building civil society through NGOs creates new channels of dependency manifest in the plethora of NGOs throughout South Asia whose institutional existence and the livelihood of hundreds of thousands of their employees now depends on foreign aid. In South Asia, when the dependence of the state on aid to underwrite its activities has been in visible decline over the last decade, the external

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dependence of the NGOs has expanded exponentially. This escalation in aid dependence of most of the NGOs raises serious problems for their sustainability since, unlike the state, very few NGOs have shown any capacity for weaning themselves from aid. Furthermore most such NGOs suffer from their own problems of accountability and transparency.

he availability of aid to underwrite the salaries of large numbers of grassroots NGO workers is paradoxically reducing the scope and impact of political parties active at the grassroots level who remain committed to the cause of the dispossessed. Similarly, many civic organisations committed to uphold the rights of the poor as an act of vocation are finding it difficult to sustain themselves. Many of these forces are losing their cadres to the NGOs and the very act of civic engagement is now being undermined by aid which promises salaries, offices and even Pajeros to those who once embraced a life of sacrifice and austerity to demonstrate their solidarity with the poor. In these circumstances, the agenda of progressive minded donors anxious to introduce democracy, human rights and the building of civil society into aid agendas, is fraught with hazard. Such donor-backed civic activism not only undermines sponteneous acts of civic mobilisation but reduces their credibility as these are seen to be inspired from outside.

Donor driven democratic governance In South Asia, donors continue to exercise a degree of political leverage. Bangladesh, Pakistan, Sri Lanka and Nepal are sufficiently dependent on aid, even today, to expose themselves to considerable pressure from donors in the area of human rights and democratic governance. Whilst this dependence on aid, in quantitative terms, has visibily declined in all these countries over the last 15 years, the dependence on policy advise from donors remains strong. The psychology of dependence on donors has become ingrained in the psyche of political and bureaucratic decision-makers and even the military who remain firmly convinced, even today, that their donors hold their political lifeline in their hands.

n South Asia, under the prevailing circumstances, we have observed that during the hightide of their dependence on aid, military regimes have ruled Pakistan from 1958-1971, 1977-1988 and from 1999 to the present, Bangladesh from, 1975 to 1979 and from 1982-89, and an autocratic monarch ruled Nepal for most of its recent history. The responsibility of the donors is not insignificant in perpetuating such autocratic rule over this long period in South Asia and indeed in much of Africa and Latin America. So great was the dependence of many of these countries on aid during this earlier period that a collective decision by the principal donors to withhold aid to any of these countries, until free and fair elections, under international supervision, were held and a plural political system established, would have elicited instant compliance. Instead aid donors underwrote these autocracies, lavished them with economic aid and in the case of Pakistan, with military aid and thereby contributed to the destruction of democracy in these countries. In each of these countries the autocratic rulers curried favour with the donors by both serving their strategic agendas and uncritically accepting their policy advise, usually communicated through

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the World Bank who became the ideological mentor of these odious regimes. In this environment of tolerance for autocratic rulers, donors also tolerated conspicuous violations of human rights as well as pervasive corruption and misgovernance in the then mistaken belief that following the economic advise of the donors would yield the prosperity which would serve as a solvent for undemocratic rule. Appeals by civic organisations to the donors to exercise their influence on the donors to improve their human rights record often went unheeded.

he problem with moves to politicise aid flow and use it in the service of ideology, lies in the inconsistency with which such principles are applied. With the end of the cold war, the presumption that aid donors have moved toward a less opportunistic perspective on aid to South Asia is belied by the passage of events after 9/11. Aid, debt rescheduling and even promise of trade consessions, were used as bait to induce Pakistan to become a strategic partner in the U.S. backed military assault on Afghanistan and to support counter-insurgency operations against the Taliban in the post-war period. Similar inducements by the U.S. and even EU have been offered to other South Asian countries to fall in line, but their strategic relevance has not been as strong as for Pakistan so no strong inducements could be offered to these 'lesser' South Asian countries. What has been notable in the case of Pakistan has been the willingness of both the World Bank and IMF to fall in line with U.S. strategic agendas and to accordingly upgrade their valuation of Pakistan's performance and back it with increased resource commitment. If aid as an instrument for promoting democracy is applied entirely on pragmatic considerations so that it does not disturb commercial or strategic relations it loses much of its value. No principle appears to underwrite such an aid policy beyond the scope for political or economic leverage and the presence or absence of a strategic and economic stake in a particular country. In the prevailing circumstances, at least within South Asia, a system of donor driven political reforms is not likely to prevail in those countries who cannot be pressured. Those who can be pressured, such as Pakistan, thus feel unfairly treated and encourage the accumulation of massive popular resentment at the injustices inherent in donor policy. Such inconsistency and even hypocrisy inherent in donor practice, if not pronouncements on using aid in the service of democracy, can often assume regime threatening proportions. Genuflecting to donor political pressures could expose a regime to democratic upheaval and even overthrow.

Towards Policy Ownership Available capacities for self-reliance What is the eventual scope for reforming aid policy in South Asia?. All countries in South Asia are now less dependent on aid than they were a decade ago. Today, these countries prioritise improved market access to the U.S., EU and Japanese market over their demand for aid. Thus, these countries can afford to take more autonomous positions in their relations with aid donors. Donors should recognise that their leverage to influence domestic policy in South Asia is less than it used to be. But this awareness also needs to be induced among South Asia's policymakers who in most countries of the region conduct themselves as if they were living in the donor-

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dominated environment of the 1980s.

n this changed context of reduced aid dependence and taking lessons from the era of 'disowned' aid, donors should recognise that most countries of South Asia should be left to design their own policy agendas and articulate their felt needs for aid. Most South Asian countries can call on the services of local professional resources, have the institutional base, political capacity and an active civil society to assume ownership over their own destiny. Donors should thus resist the temptation of tantalising hesitant South Asian regimes with offers of aid to embrace donor agendas whether for structural adjustment reforms or even for alleviating poverty and promoting human development. These are societies which are mature enough to decide what they want and what price they will pay for this. Donors remain at liberty to direct their aid to regimes which will target poverty and human development or even liberalise their trade regime. It should, however, not drive these countries towards such agendas whereby they have little commitment or capacity to implement them and embrace such policies largely in order to access fungible aid resources.

Autonomy in policy design In South Asia, every demand for aid or Technical Assistance should thus originate within the concerned country. They could prioritise their development agendas, design policies and programmes to realise these agendas by assuming responsibility for project preparation. They should in the process be able to articulate their need for technical and programme assistance. Such programmes should be underwritten by macro and sectoral policies which should articulate the need for aid at the macro and project level and define its form as to project or programme financing. The recipients should manage all such aided projects and assume full responsibility for coordinating aid. The era of the World Bank or UNDP led donor consortium or aid group should be formally terminated. All such mechanisms of aid coordination through meetings between government and donors should be located within and chaired by the host country. Ideally the recipient government should include the political opposition and civil society organisations in its consultative process for designing policies and as participants in the aid group meeting but this proposition would depend upon the maturity of the democratic culture in a country.

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free market amongst donors, where the government can sell its policy to another donor. In an open market for ideas the principal donors should not assume hegemonic postures in setting the policy agenda where all donors are expected to coordinate their strategy towards a particular country under the umbrella of the World Bank or UNDP.

aving recognised the importance of conceding ownership over policy in South Asia, the donors- particularly the U.S. and the EU- should not seek to establish new routes to policy influence by using the issue of market access as a means to gain strategic advantage in South Asia. Now that South Asia is more trade than aid dependent, this would introduce new distortions in Advanced Industrial Countries (AIC)-South Asian relations which would open up an even more disturbing hegemony over the policy autonomy of South Asia where even India would not be immune.

The primacy of ownership The argument in this paper emphasising the recapture of policy ownership in South Asia is premised on the belief, based on three decades of experience, that unless countries assume responsibility for their own destiny and commit themselves to transform the lives of their most deprived citizens, no policy reform or economic transformation is feasible and no donor can impose this on a country however weak they may be. This hypothesis remains a viable basis for aid policy in most South Asian countries because they have the capacity to take charge of their own affairs. Even though this principal has universal applicability one cannot speak with a similar degree of conviction about other regions whose capacity to assume charge of their own future needs to be ascertained after careful analysis. (Professor Rehman Sobhan is currently the Chairman of Centre for Policy Dialogue (CPD), Bangladesh and Executive Director, South Asia Centre for Policy Studies [SACEPS]).

nder such a transformed dispensation, donors should resist the temptation to prepare grey cover reports on policy reform, design projects or bring in consultants to design the TOR of a Technical Assistance project. Donors should retain their right to evaluate government proposals rather than substitute their own policy intervention. Where such proposals appear credible they should support the initiatives. Where there are policy disagreements, ideally donors should give the government the chance to implement it own policy provided that it is soundly designed and enjoys domestic political support even if it varies from a donor's notion of policy correctness (PC). If the policy fails, donors may either seek a policy change closer to what donors deem to be PC or they may withdraw aid and let the country finance its own `follies'. However even where a particular donor decides that a policy is inappropriate and thus, chooses to withhold aid, there should be some scope for a

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Rehman Sobhan, 'Technical Assistance to Developing Countries: The Failure of Market l

Table I External Resource Flows to South Asia Official Development Assistance (ODA) Received a Total ODA Per Capita ODA ODA as % of (Millions of US dollars) (dollars) GDP

Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Total South Asia South Asia as % of Total ODA to World

1980 1,282 8 2,147

1990 2,103 47 1,586

1990 19.7 32.7 1.9

429 1,152 665 6,174

2001 1,023.9 59.2 1,705.4 25.0 388.1 1,938.2 330.2 6,032.1

163 1,130 390 5,120 18.50

22.7 10.3 39.1 5.4

2001 7.3 27.9 1.7 83.2 16.1 13.2 17.6 4.2

1990 7.0 16.5 0.4 9.8 11.7 2.8 9.1 1.1

2001 2.2 11.1 0.4 4.3 7.0 3.3 2.1 0.8

12.58

11.73

Net Foreign Private flows (as % of GDP) b, c 1990 2001 0.2 0.7 0.30.0 0.6 0.7 3.1 2.1 0.20.3 0.4 - 0.5 0.6 1.5 0.3 0.7 -

Note: a: ODA receipts are total net ODA flows from DAC countries, other OECD countries, multilateral organisations and Arab countries as well as Estonia and Israel. Aggregates do not include net official aid. b: A negative value indicates that the capital flowing out of the country exceeds that flowing in. c: Private flows combine non-debt-creating portfolio equity investment flows, portfolio debt flows and bank and trade-related lending.

Forces', The International Journal of Technical Cooperation, (London: Frank Cass, 1995) vol. 1, no.1. l Rehman Sobhan, 'Official Development Finance for National Development of the Least Development Countries', Journal of International Affairs, 4 July, 1996. l Rehman Sobhan, Aid Dependence and Donor Policy: The Case of Tanzania: with Lessons from Bangladesh Experience, ( Dhaka: University Press Ltd., 1996b). l Rehman Sobhan, Towards a Theory of Governance and Development: Learning from East Asia, (Dhaka: University Press Ltd., 1998). l Rehman Sobhan, 'Bangladesh's Experience with Economic Reforms: The Need for a Reappraisal', ed. Fumiko Oshikawa, (Osaka: Japan Center for Area Studies, 1999). l Rehman Sobhan, The Future of Development Assistance: An Asian Perspective, under publication by Office of Policy Studies, (New York: UNDP, 1999). l Rehman Sobhan, 'Eradicating Rural Poverty: Moving from a Micro to a Macro Policy Agenda', IFAD/FAO, WFP, Public Lecture, Rome, 2001. l UNCTAD, The Least Developed Countries 2000 Report, (United Nations, 2000). l UNDP, Human Development Report 2003, (New York: UNDP, 2003). l Robert Wade, Governing the Market, (Cambridge: Cambridge University Press, 1990). l World Bank, Assessing Aid: What Works, What Doesn't and Why, (Oxford University Press, 1998). l World Bank, World Development Report 2000/2001. Attacking Poverty, the World Bank, (Oxford University Press, 2000/2001). l World Bank, World Development Report 2002. Building Institutions for Markets, World Bank, (Oxford University Press, 2002).

Source: World Bank World Development Repot 1988 Oxford University Press, New York World Bank World development Report 1992 Oxford University Press, New York UNDP Human Development Repot, 2003 Oxford University Press, New York

Bibliography Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, (New York: l Oxford University Press, 1969). l Commission on the Role of MDBs in Emerging Markets, Report on the Role of the

Multilateral Development Banks in Emerging Market Economies, Washington D.C, 2001. l David Hulme and Paul Mosley, Finance Against Poverty , 2 vols. (London: Routledge,

1996). l Parvez Hasan, Pakistan's Economy at the Crossroads,

(Karachi: Oxford University Press,1998). l Independent South Asia Commission on Poverty Alleviation, Our Future Our Responsibility: Road Map Towards a Poverty Free Asia, (Kathmandu: SAARC Secretariat, 2003). l K.S. Jomo (ed.), Tigers in Trouble, (London: Zed Books Ltd, 1998). l OECD, Policy Guidelines on Poverty Reduction, (Paris: OECD, 2001). l RIS, South Asia Development and Cooperation Report, (New Delhi: RIS, 2004). l Rehman Sobhan, The Crisis of External Dependence, The Political Economy of Foreign Aid, (London: Zed Press, , 1982 and Dhaka: University Press, 1984). l Rehman Sobhan, From Aid Dependence to Self-Reliance: Development Options for Bangladesh, (Dhaka: University Press Ltd, 1990). l Rehman Sobhan, Bangladesh: Problems of Governance, (India: Konark Publishers Pvt. Ltd., 1993a). l Rehman Sobhan (1994), 'Aid Versus Markets in the Institutionalization of Consultancy Service: Some Asian Contrasts', Asia-Pacific Development Journal, (Bangkok, 1994) vol. no. 1.

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organised and unorganised sectors, especially in manufacturing, which sometimes (but not always) translates into the dualism between large-scale and small-scale; the continuing significance of agriculture as a major employer; the emergence of services as the largest employers, often as a refuge sector; the involvement of by far the larger share of the workforce in what is essentially low productivity employment.

Neo-liberal Reforms Jayati Ghosh

ost of the economies of South Asia, especially India's, are often portrayed in comparative discussion as among the 'success stories' of the developing world in the period since the early 1990s. The sense that the Indian economy performed relatively well during this period may simply reflect the much more depressing or chaotic experiences in the rest of the developing world, with the spectacular financial crises in several of the most important and hitherto dynamic late industrialisers in East Asia and Latin America, and the continuing stagnation or even decline in much of the rest of the South. Compared to this, the Indian economy, along with the smaller economies in the region, was relatively stable and has been spared the type of extreme crisis that became almost a typical feature of emerging markets elsewhere. Nevertheless, the picture of improved performance is misleading at many levels, since in fact both India and the entire South Asian region as a whole, experienced economic growth which was less impressive than the preceding decade. Further, across the region this growth was marked by low employment generation, greater income inequality and the persistence of poverty. In other words, despite some apparent successes in certain sectors, on the whole the process of global economic integration did little to cause a dramatic improvement in the material conditions of most of the population, and added to the greater vulnerability and insecurity of the economies in the region. The countries of South Asia have strange relationships with one another. There is, of course, the uneasy and periodically violent interaction between India and Pakistan. There is the more complex attitude of all the smaller countries vis-Ă -vis India, along with the Indian government's own implicit perception of itself as the sub-regional power and Big Brother. There are the tentative and inchoate attempts of the various smaller countries to forge relationships with each other, overcoming histories of mistrust or alienation.

n all this, one widespread perception in the region is that each country is very different from all the others, not only in politics, history, culture and society, but also in economic structure and trajectory. But this perception is actually false, as even the most cursory investigation into economic processes in the region will reveal. It turns out that the very disparate countries of the region, which differ in size, resource endowment, particular social and political configurations, and patterns of constraints, nevertheless have a remarkable commonality of economic experience. Thus, all of these economies share certain structural characteristics. These include: the presence of a high degree of underemployment; a strong dualism between

But in addition to these, what is more noteworthy is the apparent synchronicity of policies and processes across the region, despite very differing social and political pressures. All the economies of the region had import-substituting industrialisation strategies for the first few decades after independence, with the attendant development of some industry and associated dualism in the economy, as well as regulation of much economic activity.

rom the 1980s onwards, all of them moved, to varying degrees, to a strategy of development based on export-orientation, liberalisation and privatisation based on the market-oriented neo-liberal economic paradigm. The process could be said to have started in South Asia with the Sri Lankan government of Jayawardene moving towards liberalisation and dismantling the earlier universal food security system, in the late 1970s and early 1980s. Subsequently, and more strongly in the early 1990s, all the governments in the region (barring that of Nepal, which had a different situation) went through fairly comprehensive policies of internal and external liberalisation, reduction of direct state responsibility for a range of goods and services and privatisation. While we in India may perceive specificity in our own reforms, there was still a remarkable degree of similarity even in the design and pattern of these neoliberal economic strategies across the region.

y the turn of the 21st century, most of the important economies in South Asia had undergone the following changes:

? very substantial reduction in direct state control in terms of administered prices, regulation of economic activity,

? privatisation of state assets, often in controversial circumstances, ? rationalisation (usually also a euphemism for reduction) of direct and indirect tax rates, which became associated with declining tax-GDP ratios, unsuccessful) to reduce fiscal deficits which usually involved cutting back on public productive investment as well as certain types of social expenditure, reducing subsidies to farmers and increasing user charges for public services and utilities, ? trade liberalisation, involving shifts from quantitative restrictions to tariffs and typically sharp reductions in the average rate of tariff protection, ? financial liberalisation involving reductions in directed credit, freeing of interest rate ceilings and other measures which raised the cost of borrowing, including for the government, ? moving to market determined exchange rates and liberalisation of current account transactions,

? attempts (typically

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? allowing some degree of capital account liberalisation, including easing rules for Foreign Direct Investment, allowing non-residents to hold domestic financial assets and providing easier access to foreign commercial borrowing by domestic firms. This commonality of policy experience meant in turn that outcomes were also quite similar, despite the very different initial conditions in different economies.

irst, the evidence points to increasing inequalities of income in all the economies of the region. These growing inequalities are evident in terms of differences between rural and urban residents; between households in various-size classes of expenditure; between sub-regions within countries. The widening of income gaps has also in some cases been associated with increased social and political tensions in the region, which may be expressed not so much in direct demands for redressal of income imbalances, but in terms of other ethnic, social, cultural or regional demands. Second, across all the countries in the region there has been deceleration of employment generation, compared to previous periods. This has occurred despite a slight improvement, or at least the same trend level, of growth in aggregate economic activity. In all the countries in South Asia, employment generation has not kept pace with the increase in population, and in several countries (such as India and Pakistan, for example) this has expressed itself not only in higher rates of unemployment and underemployment, but also in declining labour force participation, which is not fully explained by increased involvement in education. Third, in most of the countries in the region, there has been stagnation or increase in levels of poverty as defined by the head count ratio. India is the only country where the data are ambiguous on this matter, but even here, plausible estimates suggest that while poverty has declined somewhat over this period, the rate of decline has reduced compared to the earlier periods. Such evidence on poverty across the region is broadly in conformity with the evidence on widening inequality and decelerating employment that has already been mentioned.

ourth, the relative decline of manufacturing, especially in the small scale sector, and the stagnation or decline of manufacturing employment, is marked across the region, with the exception of Sri Lanka. In different countries of the region, agriculture and or services appear to have become residual refuge sectors for workers who cannot find productive employment in industry; in India, however, even agricultural employment has declined. Across the region, there appears to be relatively little link between rates of aggregate economic growth and total employment generation in the recent past. Fifth, in all countries of the region the quality of employment appears to have deteriorated, with an increase in casual and part-time work, as well as greater fragility of contracts and indications that day labourers find fewer days of work. Real wage rates have typically stagnated in most countries; certainly wage share of income has declined in all countries.

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hese patterns of growth and employment observed in the different economies of South Asia since the early 1990s, call into question the arguments advanced by the advocates of neo-liberal reform, that there is a direct link between such reform and economic growth. Such a link tends to be based on the premises that both internal deregulation and external liberalisation spur private investment, that curbing public investment is beneficial for aggregate growth because otherwise it tends to 'crowd out' private investment, that privatisation delivers assets to those who are likely to make socially more desirable use of them, and that private agents acting on their own will deliver both more efficient and more dynamic outcomes. This optimistic perception ignores the widespread evidence of market failure, at both microeconomic and macroeconomic levels, as well as the strong evidence of close positive links between public and private investment. There are obvious reasons why such an argument therefore would not hold over either short run or longer run time horizons, especially in developing economies such as those in South Asia. Given the unequal asset and income distribution that exist and the consequent limited nature of the home market, private investment would come up against a demand constraint fairly rapidly. This would be aggravated when the type of private investment that occurs does not generate that much employment, as is likely when the investment is in sectors catering to richer consumers with production involving high import content or more capital-intensive technology.

ublic investment in developing countries tends to have strong positive linkages with private investment, not only because of the standard Keynesian mechanism, but because it also operates to ease infrastructure and other supply constraints, making private production easier and cheaper. Therefore, a strategy based on reducing public investment and hoping for deregulated private investment to fill the gap, could well be expected to generate lower aggregate investment and growth trajectories than one which allows for an important role for public investment. This argument is actually borne out by the experience of almost all the countries of South Asia that have been briefly discussed above. As we have seen, by the turn of the decade, governments in the region had already achieved major liberalisation and deregulation in many important areas of the economy. Thus, internal and external trade were almost completely liberalised in all the countries of the region by 2001. Domestic deregulation especially for large capital was extensive and provided much greater freedom to private investors in general. Attempts to control the fiscal deficit in order to prevent 'crowding out' of private investment meant cuts in government productive expenditure and substantial reduction in the 'primary deficits' (that is, net of interest payments). Many cases of privatisation of public assets were pushed through even at rock bottom prices. Despite all this, if growth still tended to slacken, the problem obviously lay to a substantial extent with the neoliberal reform process itself. And this was manifested in the fact that in aggregate terms the reform process did not generate either higher

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rates of investment in the aggregate or increases in the productivity of such investment.

n India, the rate of growth of aggregate GDP in constant prices has been between 5.5 per cent and 5.8 per cent in each five-year period since 1980, and the process of accelerated liberalisation of trade and capital markets did not lead to any change from this overall pattern. Indeed, recent years have witnessed a decline in average GDP growth rates to less than 5 per cent per annum. More significantly, the period since 1990 has been marked by very low rates of employment generation. Rural employment in the period 1993-94 to 1999-2000 grew at the very low annual rate of less than 0.6 per cent per annum, lower than any previous period in postIndependence history, and well below (only one-third) the rate of growth of rural population. Urban employment growth, at 2.3 per cent per annum, was also well below that of earlier periods, and employment in the formal sector stagnated1. There has been, for the past two years, a severe crisis in the agriculture sector, as cultivators have been hit by the threat of import competition from highly subsidised imports, which have kept prices low, even as they struggle to cope with higher costs because of cuts in domestic input subsidies. Other indicators point to disturbing changes in patterns of consumption. Thus, per capita foodgrain consumption declined from 476 grams per day in 1990 to only 418 grams per day in 20012. The National Sample Survey data also suggest that even aggregate calorific consumption per capita declined from just over 2200 calories per day in 1987-88 to around 2150 in 1999-2000. Given the aggregate growth rates and the evidence of improved lifestyles among a minority, this points to substantially worsening income distribution, which is also confirmed by national survey data3. Meanwhile, declining capital expenditure by the government has been associated with more infrastructural bottlenecks and worsening provision of basic public services. All these features: decelerating employment growth, declining access to food for ordinary people, and worsening coverage and quality of public services, have had particular impact upon the condition of ordinary women.

he major positive feature which is frequently cited, that of the overall stability of the growth process compared to the boom-and-bust cycles in other emerging markets, reflects the relatively limited extent of capital account liberalisation over much of the period, and the fact that the Indian economy was never really chosen as a favourite of international financial markets over this period. In other words, because it did not receive large inflows of speculative capital, it did not suffer from large outflows either. Meanwhile, stability to the balance of payments was imparted by the substantial inflows of workers' remittances from temporary migrant workers in the Gulf and other regions. This has amounted for more than all forms of capital inflow put together. While the Indian experience of the recent past is not reflective of the impact of external debt, it does indicate one crucial aspect of the explicit policy of wanting to attract capital inflows of all forms into the economy. While the actual inflows have not

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amounted to much, the apparent desire to attract and maintain such inflows has led to significant constraints on government policy. In particular, there have been (selfimposed) limits on fiscal expansion. This has had unfortunate implications, especially in the past two years, which have involved hardly any increases in the state's productive expenditure, despite domestic recession, unemployment, crisis in agriculture, and clear signs of slack in the form of high surplus holdings of food grain and large foreign exchange reserves. In other countries of the South Asian region, the economic growth experience subsequent to liberalisation has generally been even less impressive. In Pakistan, average annual growth rates plummeted in the 1990s, compared to the earlier decade, by about one-third. The deceleration in growth was associated with historically low rates of investment, as private investment failed to pick up and counterbalance the decline in public spending. Industrial growth rates almost halved from 8.2 per cent to 4.8 per cent per annum. The earlier success at reducing poverty was reversed in the 1990s, as the per cent of households living in absolute poverty increased from 21.4 per cent in 1990-91 to 32 per cent in 2000-01. By June 2001, therefore, 40 million Pakistanis were living below the poverty line. Unemployment rose, real wages fell and income distribution worsened. Human development indicators, which were poor to start with, worsened over this period. Several analysts have blamed this on the single-minded pursuit of the government's economic managers to achieve stabilisation targets a la the IMF at the cost of growth and poverty alleviation.

he past two years have involved even more economic volatility, although here military instability in the region, including the U.S.-led war on Afghanistan and the build-up of troops along the border with India, could have played a role as well. Recent geopolitics has impacted in different ways upon Pakistan's economy. The desire of the United States to use Pakistan as an ally has meant the waiver or rescheduling of some external debt, which provides short-term relief but implies future problems. However, uncertainty and instability in the region has also meant falling domestic and external investment. In Bangladesh, while aggregate growth rates over the 1990s were marginally higher than in the earlier decade, the overall incidence of poverty (at around 45 per cent of the population) has been stubbornly resistant to change. Indeed, the rate of poverty reduction slowed down after 1994-95, because of both lower growth of production and lower employment generation. Industrial growth was positively affected by the expansion of the export-oriented textile sector (taking advantage of previously unutilised MFA quotas) in which most workers are young women involved at the lowest end of a global manufacturing chain. But other than textiles and garments, most manufacturing sectors have stagnated or declined. Such employment growth as there has been has occurred in agriculture and services sectors, mostly in informal activities. Industrial employment has been stagnant, and the entrenched dualism in the labour market continues.

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ll the productive sectors in Bangladesh have been adversely affected by trade liberalisation in India, given the porous border, which allows for the possibility of substantial smuggling. Thus import penetration has adversely affected production and employment in both agriculture and most manufacturing, and even sectors of rural economic diversification such as livestock and poultry rearing. Income distribution worsened over the 1990s. The economy of Nepal has been similarly affected by Indian trade liberalisation because of its open border with India. Growth in the productive sectors has been weak, especially in agriculture where the removal of subsidies was not accompanied by public investment in rural infrastructure. In Sri Lanka, relatively low growth in the 1990s (especially in the agricultural sector) was associated with high macroeconomic imbalances, high trade deficits and reduced employment generation. Domestic political strife and the state of war in the North were only partly responsible for this; an important role was played by the decline in value of agricultural exports, the mainstay of Sri Lanka's economy. Throughout the region, therefore, the process of increased integration with the global economy was not associated with higher GDP growth or more productive employment generation, or improved performance in terms of poverty reduction. Rather, employment possibilities became more fragile and there were clear income distributional shifts towards increased inequality. In all the countries, the combination of attempts to impose â&#x20AC;&#x153;fiscal disciplineâ&#x20AC;? by cutting public expenditure resulted in adverse consequences for producers as well as reduced quality and quantity (in per capita terms) of physical infrastructure and basic public services. The loss of revenues from import tariffs, the associated necessary declines in domestic duties, and the need to provide incentives to capital through tax concessions, all led to declines in tax-GDP ratios across the region, further reducing the spending capacity of the governments. All the governments in the region now recognise that employment generation has been a major failure of the reform process so far. In fact, increasing employment generation is now the explicit concern in most of recent planning and policy documents that have been published in the region.

t is strange, however, that while the explicit goal has changed from growth in itself to employment generation, the strategies that are supposed to achieve this essentially involve further doses of neo-liberal marketist reform, rather than policies that would directly affect employment. Thus, most of the policy statements refer to further privatisation, further deregulation of domestic economic activity, further financial liberalisation and external capital account liberalisation, and further restrictions on fiscal policies. These are precisely the set of policies that, as observed already, have been associated with deceleration of employment in the past decade. If employment generation is to be the focus of the new policy thrust in the region, then it would actually require a rethinking of these policies, towards more active state intervention in terms of

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supporting employment-intensive activities through a range of trade, fiscal and financial measures. Without such active involvement, aggregate employment in the region is likely to continue to stagnate, and may even deteriorate with further doses of neoliberal reform.

f such have been the consequences of the process of global integration, adversely affecting the material circumstances of the large bulk of citizenry in the region, what has influenced government policy in all these countries to make the neo-liberal economic strategy so inevitable nonetheless? What was the domestic political and social support for the process of liberalisation, which made it fit so neatly into the requirements imposed by international imperialism? Obviously, the political economy processes involved are complex and vary from country to country. But some idea may be had from a more detailed consideration of the Indian experience. One of the interesting features of the political economy of the Indian strategy of liberalising economic reform has been the initially conditional and subsequently more unqualified support extended to it by various elements of the large capitalist class and other social groups which have substantial political voice, such as middle class and professional groups. To some extent this can be explained by the proliferation and diversification of the Indian capitalist class that took place during the years of importsubstituting growth and later. There were three factors that led to this. The first was related to the process of introduction of new products and markets. In India over time there were a number of areas outside the traditional bases of existing monopolistic groups, such as trade, finance, services of various kinds and operations abroad by Non-Resident Indian groups, which served as sites for primary accumulation of capital.

ver time, groups that had accumulated capital in this fashion sought to diversify into manufacturing, not only by entering new niche markets, but also by investing in large capacities in industries characterised by economies of scale. This created a direct challenge for several of the traditional monopolies, which had in the past been protected by the barriers to entry created by the government's industrial and trade policies. The new entrants welcomed deregulation and also, because of newer technology, were less averse to import competition. Established large capital found its relative position worsening in the economy over time. To reverse this decline, it looked for new avenues, including expansion abroad through the export of capital and by moving into areas previously reserved for smallscale entrepreneurs. So even the established big businesses that were, to start with, the beneficiary of state controls of various kinds, began to chafe against these controls at a certain stage. Among certain other sections such as the agricultural capitalists the economic regime change met with qualified approval, though parts of it were objected to. Agricultural capitalists, while being hostile to the withdrawal of subsidised inputs and directed credit, favourably anticipated the prospect of exporting at favourable prices in the international market.

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In the event, a substantial section of domestic capital was willing to make compromises with metropolitan capital on the terms that the latter demanded. It was, therefore, all for allowing metropolitan capital to capture a share of the Indian market even at the expense of the entrenched capitalists, not to mention the public sector, in the hope of being able to better its own prospects as a junior partner, both in the domestic as well as in the international market. It was thus in favour of import liberalisation, a full retreat from state interventionism, and accepting the kind of regime that metropolitan capital generally, and the World Bank and the IMF as its chief spokesmen, had been demanding.

upport for liberalisation was growing not just among a section of industrial and agricultural capital. A whole new category of an altogether different kind of businessman was coming up, containing those who were more in the nature of upstarts, international racketeers, fixers, middlemen, often of 'non-resident Indian' (NRI) origin or having NRI links, often linked to smuggling and the arms trade. Such private agents in any case did not have much of a production base, and their parasitic intermediary status as well as the international value of their operations naturally inclined them towards an 'open economy'. And finally, we should not exclude a section of the top bureaucracy itself, which had close links with the Fund and the World Bank, either as ex-employees who might return any time to Washington D.C., or through being engaged in dollar projects of various kinds, or as hopeful aspirants for a lucrative berth in Washington D.C. The weight of this section in the top bureaucracy had been growing rapidly, and its inclination naturally was in the direction of the Washington Consensus-style policy regime. Thus, quite apart from the growing leverage exercised by the international agencies in their capacity as 'donors', the internal contradictions of the earlier economic policy regime generated increasing support within the powerful and affluent sections of society for changing this regime in the manner desired by these agencies.

esides this support from large corporate capital, the large and politically powerful urban middle classes, along with more prosperous rural farming groups, whose real incomes increased in the consumption-led boom of the 1980s, actively began to desire access to international goods and gave potency to the demands for trade liberalisation. And of course the technological and media revolutions, especially the growing importance of satellite television, imparted a significant impetus to the international demonstration effect, which further fuelled liberalising and consumerist demands. One important social change, which was arguably influential in creating pressures for the shift in macroeconomic strategy, was the accelerated globalisation of a section of Indian society. Apart from the media, one major instrument of this was the postwar Indian diaspora. The 'NRI phenomenon', by means of which a qualitatively significant number of people from the Indian elite and middle classes actually became resident abroad, contributed in no small measure to consumerist demands for opening up the economy. The importance of Non-Resident Indians was not only because they were viewed as potentially important sources of capital inflow, but also because of their

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close links with (which in many cases made them almost indistinguishable from) dominant groups within the domestically resident society. It should be remembered that while the liberalising reforms failed in the aggregative sense and also in terms of delivering better conditions for most of the Indian population, there was a definite improvement in material conditions for a substantial section of the upper and middle classes. Since these groups had a political voice that was far greater than their share of population, they were able to influence economic strategy to their own material advantage. It is in this sense that local elites and middle classes were not only complicit in the process of integration with the global economy, but active proponents of the process.

hile the neoliberal economic reform programme entailed a changed relationship of government interaction with economy and polity, it was not a 'withdrawal of the state' so much as a change in the character of the association. Thus, while the state effectively reneged on many of its basic obligations in terms of providing its citizens access to minimum food, housing, health and education, state actions remained crucial to the way in which markets functioned and the ability of capital to pursue its different goals. Government and bureaucracy remained crucial to economic functioning at the end of the decade of reforms; in fact the overall context was one of greater centralisation of economic and financial power. Many had believed that a 'retreat of the state' and the exposure of the economy to the discipline of the market would cut out arbitrariness of decision-making and the corruption that is inevitably associated with it. It would streamline the functioning of the economy by making it a 'rule-governed system', though admittedly the rules of the market. What happened instead in the Indian economy during this period of neoliberal structural adjustment was an increase in the level of corruption, cronyism, and arbitrariness to unprecedented levels. The privatisation exercise became another vehicle of primitive accumulation by private capital as it acquired public assets cheaply. Precious natural resources, hitherto kept inside the public sector, were handed over for a pittance (and alleged 'kickbacks') to private firms with dubious objectives. With the wider corruption that increasingly pervaded the system, the 'discipline of the market' proved to be a chimera.

cross the South Asian region, indeed, and not confined only to India, the period has witnessed an increase not only in levels of open corruption but also in a decline in substantive democracy and acceptance of basic socio-economic rights of citizens. While the formal denial of democracy has been more limited (as in Pakistan) across the region, the states have in effect become more centralising and more authoritarian in certain ways, even as their ability to control events and processes becomes more tenuous. It could be argued that the centralised, centralising and increasingly authoritarian state is in fact a necessary requirement for this type of liberalisation which is based more on external legitimisation (from foreign financiers and the perceived discipline of international markets) rather than on internal legitimacy derived from the support

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of the majority of its citizens. Such a change in the nature of the state may therefore be a fallout of the substantially increased income inequalities associated with liberalisation and the social and political processes that they unleash. These inequalities have accentuated certain longer-term structural features of South Asian societies, whereby more privileged groups have sought to perpetuate and increase their control over limited resources and channels of income generation in the economy. This, in turn, has involved the effective economic disenfranchisement of large numbers of people, including those who occupied particular physical spaces in rural areas, or were urban slum dwellers who constituted both the reserve army of labour for industrialisation and the most fertile source of labour supply for extra-legal activities. The basic disregard for 'rule of law' which has characterised economic functioning in most parts of South Asia over several decades, became even more pronounced in this period, with both economic and other lawlessness becoming accepted features pervading all aspect of civil society, and allowed everything even the rights of citizens to become marketable and negotiable. Meanwhile, ordinary citizens tended to experience reduced civil liberties and security along with worsening socio-economic rights, which may even have been necessary to allow the more centralised state to direct particular forms of lawlessness to the benefit of powerful agents and groups These concomitant trends of greater economic and financial centralisation and increased income inequality in turn operated to aggravate the various regional, fissiparous and community-based tensions that have become such a defining feature of South Asian societies and polities. One of the features of the region as a whole has been an increase in the degree of instability and the growing absence of security. It has been reflected not only in greater cross-border tension, as between India and Pakistan, but also in civil and communally inspired clashes within national boundaries. These conflicts both emerge from the prevailing material contradictions and contribute to them. They also serve the very important political economy use (for the states concerned) of distracting people from the real and pressing issues resulting from the governments' denial of basic economic responsibility, and serve to direct anger in other less potentially threatening directions.

bviously, not all such tension has had a direct and monocausal material underpinning. Nevertheless, it is true that the combination of greater material insecurity in terms of both lower real incomes and more precarious employment opportunities for a very large section of the population, with the explosion of conspicuous consumption on the part of a relatively small but highly visible minority, can have very adverse social and political consequences. The frustration that may arise because of the gap between aspiration and reality for growing numbers of people in the system can be only too easily directed towards any apparent or potential competitor in such a system, or even to those who are not in competition but simply represent a group that can be attacked with relative ease. The streak of venom that has been periodically directed towards various minority groups across the region can be seen as one expression of this trend. The inability to confront those who are responsible for the system, or actually benefiting from it, or even the lack of desire to

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confront these much more powerful elements, given that they still have the power to distribute some amount of material largesse, has meant that they could not become the direct objects of any aggressive vent for frustration. Rather, the outlet was increasingly found in terms of growing antagonism, increasingly finding violent expression, towards other categories of people who are nearer home, closer in terms of lifestyle and more susceptible to such attack. It is worth noting that often these groups are already the most disadvantaged and materially weak sections of society.

here is a broader international context to this, which is particularly reflective of this phase of imperialist globalisation. Across the world, in both developed and developing countries, there is a greater tendency on the part of the rulers, and those who are privileged in society, to ignore the interests of the majority and to blatantly push for those policies that will only benefit a small minority. The rise of finance capital and the hugely powerful role played by speculative capital in determining the fortunes of even large industrial countries has made this even sharper. Increasingly, governments point to the threat of capital flight as the reason why they cannot undertake basic measures for the welfare of most of the citizens, since anything that involves more expenditure for the people is inherently viewed with disfavour by international capital. Of course, this international tendency then has its counterpart in each national economy, as particular groups that actually benefit from the process seek to establish that 'there is no alternative'. Which is why we have the spectacle of local elites and governments not just advocating, but also able to continue to push through, policies that are likely to be to the detriment of most of the people. The situation is neither inevitable nor permanent, however, and the contradictions in the global system that were outlined earlier mean that even in particular regions, more progressive forces that will instigate change are likely to surface. (Jayati Ghosh is professor of Economics at Jawaharlal Nehru University, New Delhi).

End Notes 1.

The only positive feature in employment patterns was the decline in educated unemployment, largely related to the expansion of IT-enabled services in metropolitan and other urban areas. However, while this feature, along with that of software development, has received much international attention, it is still too insignificant in the aggregate economy to make much of a dent. Of course, it has been argued that this can represent a positive diversification of consumption away from food grain that is associated with higher living standards. But it is usually the case that aggregate food grain consumption does not decline because of indirect consumption of grain (for example, through meat and poultry products that require feed). In any case, the overall decline in calorific consumption (covering all food products) suggests that the optimistic conclusion may not be valid. While the evidence on poverty has been muddied by changes in the procedure of data collection, which have made the recent survey data non-comparable with earlier estimates, overall indicators suggest that while the incidence of head-count poverty had been declining from the mid 1970s to 1990, subsequently that decline has been slowed or halted.

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Bibliography l C. P. Chandrasekhar and Jayati Ghosh, The market that failed: A decade of neoliberal

economic reforms in India, (New Delhi: Leftword Books, 2002). l V. K. Ramachandran and Madhura Swaminathan (eds.), Agrarian Studies, (New Delhi:

Tulika Books, 2002). l Prabhat Patnaik, Whatever happened to imperialism?, (New Delhi: Tulika Books, 1995). l Prabhat Patnaik, The retreat to unfreedom: Reflections on the current world order, (New

Delhi: Tulika Books, 2002). l Delhi Science Forum, Alternate Economic Survey 2001-02. l Mahbub-ul-Haq Development Centre, South Asia Human Development Report 2002 and

2003, Lahore, Pakistan. l Jayati Ghosh, Women in India: A status report, 2003, available at www.macroscan.org l William Easterly, The political economy of growth without development: A case study of Pakistan, (Washington, D.C.: The World Bank, 2001). l M. Muqtada, 'Promotion of employment and decent work in Bangladesh: Macroeconomic and labour policy considerations', (Geneva: ILO, 2002).

Informal and Free Trade Arrangements Nisha Taneja

he importance of studying informal trade in South Asia can be best understood if it is placed in the context of formal trade. The South Asian countries have made several attempts at enhancing trade in the region. As early as 1985, the South Asian countries of Bhutan, Bangladesh, India, Maldives, Sri Lanka, Pakistan and Nepal formed the South Asian Association for Regional Co-operation (SAARC). In 1991, a South Asian Preferential Trading Arrangement (SAPTA) amongst the SAARC member countries was set up with the ultimate goal of achieving a South Asian Free Trade Area (SAFTA). The signing of the SAFTA at the 12th SAARC Summit held in Islamabad is now a reality. In addition, there have been several bilateral free trade agreements within the region. India has free trade agreements with Bhutan and Nepal and has recently signed one with Sri Lanka. Similarly, Free Trade Arrangements are being negotiated between Pakistan and Sri Lanka and between Bangladesh and Pakistan. Despite such efforts by the South Asian countries, trade within the countries continues to be abysmally low. Clearly there would be other mechanisms that would inject vitality into trade flows in the region. One way would be to focus on the large and vibrant informal trade in the region. It is in this context that the present focus is on informal trade flows in the South Asian region. Available evidence suggests that informal trade is rampant and if such trade is brought within the ambit of official trade, a significant increase could be witnessed. However, this will largely depend on the nature of informal trade, which is discussed later.

here are two key issues that are at the forefront of studying informal trade in the South Asian region- the magnitude of such trade and the factors underlying such trade flows. Quantitative estimates are important since they would reflect the extent of potential trade that exists in the region. If recorded trade statistics give a misleading picture of the actual amount of trade taking place, poor regional trade policies may be formulated. In the latter issue it is important to understand the institutional mechanism that drives informal trade, how it differs from formal trade and why such trade takes place. To the extent that high tariffs and non-tariff barriers in the South Asian region encourage the use of informal channels, bilateral/regional Free Trade Arrangements would induce a shift of informal trade flows to formal trade channel. However, if there are factors other than trade policy distortions that determine informal trade, then a deeper understanding is needed. Thus, as long as the transacting environment for informal trading is more efficient than that of formal trading, informal trade may continue to co-exist with formal trade. It is useful to

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classify factors determining informal trade flows into two broad categories: (i) those that are related to trade policy barriers and (ii) institutional and other factors. ince India is the only country which shares its borders with almost all the South Asian countries and at the same time no country shares its border with countries other than India within South Asia, the central actor in informal trade has been India. India shares a long and porous border with Bangladesh, Nepal and Pakistan. Informal trade with these countries largely takes place across the land borders. Informal trade with Sri Lanka takes place largely through air passengers, with a small proportion being carried out by sea through country boats. A crucial aspect to be kept in mind while analysing issues related to informal trade is the definition of such trade flows. Informal or unrecorded trade is broadly defined to include all trading activities between any two countries which should be included in the national income according to national income conventions but are presently not captured by official national income statistics.

I. Magnitude of Informal Trade The only method to estimate informal trade flows is through primary surveys. The Delphi technique is the most robust methodology used so far. It is essentially used for gathering and processing the opinions of informed individuals. The iterations are repeated till broadly converging responses are received. Reasonably good estimates are available for Bangladesh, Nepal and Sri Lanka that are based on the Delphi technique. Estimates for Bhutan are based on primary surveys, but the methodology is not clear. Information on estimates for Pakistan is quite scanty, though its informal trade is believed to be the largest in the South Asian region. It is worth noting some interesting features. Total informal trade in the South Asian region exceeds US$ 3 billion which is almost double the formal trade in the region for corresponding years for which informal trade estimates are available. India's informal trade with Pakistan is almost ten times that of formal trade in the region, that with Nepal and Bangladesh is almost as large as formal trade, with Sri Lanka it is almost one-third of formal trade and that with Bhutan is three times as much as formal trade. (see Table1 and Table 2) Another noticeable feature is the fact that India has a trade surplus with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial trade account, while with Nepal it has a trade deficit. Interestingly, a similar pattern can be observed on the official trade account. (See Table 1 and Table 2)

ne also needs to examine the extent to which the composition of formal and informal trade differs. Of the US$ 2 billion informal trade with Pakistan, almost half is traded through third countries (technically official trade) such as Dubai, CIS countries and Afghanistan, while the remainder is cross-border informal trade. Unofficial exports through both routes comprise machinery, cement, tyres, tea, medicines, videotapes, alcoholic beverages, chemical products, steel utensils etc.- the range covering low cost mass scale produced goods to Indian branded items such as Tata's Tetley tea and products made by Dabur and Pioma Industries. Informal imports from Pakistan consist of food items, synthetic fibers and some chemical

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products.

ndia's official exports to Pakistan consist largely of food items- the main item being animal feed stuff; primary products mainly iron ore and crude vegetable materials, and manufactured goods- the chief item being building material. Official imports 1 India's Informal Trade with South Asia comprise of food items, Table mainly sugar and dry fruits. Bangladesh1 Sri Lanka 2 Pakistan3 Nepal4 Bhutan 5 Total South Asia

Exports (X) 299.0 185.5 n.a. 180.0 31.3 -

Imports (M) 14.0 21.8 n.a. 228.0 1.2 -

Trade Balance (X-M) 285.0 163.7 Positive -48.0 30.1 -

Total Trade (X+M) 313.0 207.3 2000 408.0 32.6 2960.9

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al. (2002) for Sri Lanka and Nepal; Economist (1996) for Pakistan; Rao et. al. (1997) for Bhutan. Notes : X denotes exports while M denotes imports. Table 2 India's Formal Trade with South Asia 1. (1992-93), 2. (2000-01), 3. (1996), 4. (2000-01), 5. (1993-94)

Bangladesh1 Sri Lanka 2 Pakistan3 Nepal 4 Bhutan5 Total South Asia

Exports (X) 349.1 640.2 157.2 141.0 7.0 -

Imports (M) 7.8 45.0 36.1 255.0 3.0 -

Trade Balance (X-M) 341.2 595.2 121.1 -114.0 4.0 -

Total Trade (X+M) 356.9 685.2 193.3 396.0 10.0 1641.4

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al.(2002) for Sri Lanka and Nepal; Commodity Trade Statistics for Pakistan, Nepal and Bhutan. Notes: X denotes exports while M denotes imports. 1. (1992-93), 2. (2000-01), 3. (1994), 4. (2000-01), 5. (1994).

s Bangladesh is sandwiched between the north-eastern region of India and the West Bengal borders of India, informal trade between India and Bangladesh takes place both along the borders between West Bengal and Bangladesh and between the north-eastern regions and Bangladesh. Commodities exported informally from India to Bangladesh through West Bengal comprise of cattle, sugar, kerosene oil, sarees, bicycles, automobile components and parts and other consumer goods like plastic items, razor blades, medicines etc. Items imported from Bangladesh into India through West Bengal comprise of synthetic fabrics, spices and Hilsa fish. Informal exports from the North East Region to Bangladesh comprise fruits, fish, sugar, cattle, raw cotton, spices, medicines, sarees and coal. Imports on the other hand consist of polythene, palm oil, plastic shoes and a range of miscellaneous consumer items. The formal exports are dominated by industrial manufactures among which textile products is the largest item. India's formal imports from Bangladesh comprise largely of crude raw materials- chiefly jute, and Chemical related products- mainly fertilisers.

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ndia exports informally sarees, electrical and mechanical items, textiles and utensils to Sri Lanka while informal imports consist of spices, electronic items,

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in informal trade cannot resort to the law for violation of terms of contract. Consequently, it is reasonable to assume that individuals trading through the informal channel have developed parallel institutional mechanisms for contract enforcement and dispute settlement. Also, the smooth functioning of such markets shows that traders have developed efficient mechanisms for obtaining information on quantities and commodities to be traded and for mitigating risk that arise from the transacting environment. On the other hand, it is important to understand the institutional structure that supports formal trade where exchange is affected by factors which are not related to the physical process of production, such as administrative processes, government rules and regulations, infrastructure bottlenecks, etc. Thus, if the institutional arrangement under informal trading is more efficient than that supporting formal trade, traders may prefer to trade informally.

he inadequate transport and transit systems that have been in existence between India and her neighbouring countries have led to high transportation costs in the region. One major hurdle in road transport between India and Bhutan is the temporary blockages due to landslides. In the case of trade between India and Nepal, the terrain in Nepal makes building and maintaining roads not only difficult but expensive as well. Even with respect to transit modalities several bottlenecks have been identified: port congestion, excessive documentation, delays3, slow movement of goods, non availability of equipment and railway wagons, transhipment and other indirect costs. A large part of trade therefore takes place informally. Thus traders use the informal channel in order to save on transportation costs. Particularly in the case of perishable commodities it is more cost effective to trade informally. Thus, as long as transport costs are higher in the formal channel than in the informal channel, informal trade will continue to take place. There are other transaction costs that emanate from the transacting environment of formal and informal trading. While informal trading markets function smoothly, there are costs that have to be incurred to mitigate the risk associated with such transactions. Risk in such trading has been found to be extremely low. For instance in Indo-Bangladesh informal trading, the probability of goods being seized was less than 0.1 while that in Indo-Nepal and Indo-Sri Lanka informal trading was still lower at 0.034. In fact, studies have shown that even when goods are seized, they can be released on nominal payments5. On the other hand, formal trading procedures are extremely complex in the South Asian region. For instance the number of documents that need to be filled up for trading is 29 for India, 83 for Nepal and 15 for Pakistan6. Also clearances have to be obtained from multiple agencies at various stages of trading that include obtaining licences and getting clearances from banks. Such procedures not only involve incurring costs in terms of time taken but also lead to rent seeking activities. Traders are known to pay hefty bribes at various stages of trading before their goods can finally reach their destination.

ntrinsic to the activity of trading is the issue of payments. Formal banking facilities are not only inadequate in the region but also very time consuming. Traders have to wait for several days before their payments can be realised. The informal banking

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system, on the other hand, is very organised and payments are not only ensured but are also very quick. The uniqueness of the informal banking system is that there is no physical transfer of currency. This mechanism, referred to as Hawala in India, Hundi in Bangladesh and Undiyal in Sri Lanka, operates on the same principles. Partner country currencies are easily convertible in the informal money market making it possible for traders to trade in different currencies. In fact, the informal banking is so efficient that payments can be received within a day. Traders may therefore prefer to use the informal channel as it has a better payments mechanism than the formal channel.

erhaps what lies at the core of informal trading markets is the close ethnic ties between trading markets. A common language, religion, culture etc., play a crucial role in facilitating trading across the border. This is particularly so where the same ethnic community is divided into two national boundaries; for example in the case of India, Bangladesh, Pakistan and Nepal. There are strong ethnic links between the Tamils in South India and those in Sri Lanka. Ethnic ties amongst trading partner countries in the informal channel not only ensure that payments are made but also go towards reducing risk and other transaction costs in carrying trade across borders. It has been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka informal trading ethnic ties are stronger in the informal channel than in the formal channel7. In some cases, traders trade informally not because they are unwilling to abide by laws and regulations but rather because they lack the necessary resources to do so. A large number of informal traders have low levels of education. The lack of education deters traders from using the formal channel. Also, lack of education would preclude traders from having information on trade policy. Most informal traders are not aware of the details of different trading arrangements. In fact informal traders in Sri Lanka have pointed out that the terms and conditions of trade agreements are available only in English and not in any local language spoken in the two countries8. Under such conditions, traders would prefer to use the informal channel. It has been found in various studies that in Indo-Nepal, Indo-Bangladesh and Indo-Sri Lanka trading, levels of education for formal traders are significantly higher than those of informal traders9.

III. Concluding Remarks It is evident that informal trade in the region is quite large and cannot be ignored in any policy dialogue. The Framework Agreement for SAFTA signed at the 12th SAARC Summit does not address this issue. Informal trade between India and Pakistan, believed to be the largest is a subject area where not much information exists. As the two countries move closer to improved trade relations, it is important to understand the functioning of such markets and the inadequacies of the formal trading channel. The Indo-Sri Lanka Comprehensive Economic Partnership Agreement Framework signed recently includes trade services, corrects the anomalies of the currently operational Indo-Sri Lanka Free Trade Agreement but makes no attempt to look into the issues of informal trade. India and Nepal have a long history of bilateral FTAs signed since 1961, but these agreements have focused only on unauthorised trade in

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third country goods, with clear reference to flow of goods informally from Nepal to India. It is not widely known that informal trade from India to Nepal in locally produced goods is of equal magnitude and cannot be ignored in bilateral talks. The bilateral Free Trade Agreement between India and Nepal was renewed in 2002 but did not recognise the importance of the two-way informal trade flow. There is no doubt that the implementation of SAFTA and other bilateral trading arrangements would lead to a reduction in informal trade flows. It may be stated here that the incidence of informal trade, particularly in goods from third countries into India has come down with lowering of tariffs in the region. For instance, in 1991, informal trade in third country goods from Sri Lanka to India was almost as large as informal trade from India to Sri Lanka. Further, in 1990, informal trade in third country goods from Nepal to India was almost 10 times of formal trade10. Recent estimates of informal trade in third country goods show that such trade has come down considerably and further reduction and harmonisation of tariffs would reduce the incidence of informal trade.

t is evident that the institutional mechanism in the informal trading market facilitates informal trade. The channels through which informal trade takes place are rooted in the strong ethnic ties among the traders and in the historical linkages in these societies. Ethnic trading networks that operate on trust and honesty mitigate risks associated with such trading. The involvement of law enforcement agencies to collect rents (thereby mitigating informal trading risks) makes the transacting and transporting processes smooth and acts as an added incentive to carry on informal trade. It is easily perceived that informal trade under these circumstances would be difficult to eliminate. While it can well be argued that if the transacting environment for informal trading is more efficient than for formal trading, why not let it continuethe danger is that the associated money laundering to finance such trade deals might prove to be a threat to the smooth functioning of formal capital markets. A focus on law enforcement agencies to detect and obstruct informal transit of goods across borders is not a viable solution as increase in enforcement mechanisms could only lead to increase in rent collections. What would be more effective would be to reduce the impediments to trade in the formal channels. Time delays due to unnecessarily long and complicated procedures need to be reduced by simplifying procedures. Clearly, the reform process in the South Asian countries should undertake institutional reforms so that transaction costs can be lowered. This would also have a much larger impact in the form of trade expansion from and within the South Asian region. Information is another important aspect, which has to be looked into. It is true that a major proportion of informal traders are locals who do not have high levels of education or are only conversant with local languages. Such gaps have to be filled by suitable dissemination of information and creation of awareness among traders of the various norms.

n sum, while informal trade is unlikely to be totally eliminated because ethnic trading networks between trading partners would continue to facilitate informal trade by reducing transaction costs through minimisation of risk costs, market

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information and search costs; further reduction of tariffs, improvements in the transacting environment of formal trade, improving awareness and education levels

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Pakistan, India and Regional Cooperation Shahid Javed Burki

Introduction The main conclusion reached in this essay is that the full and unconstrained resumption of trade on the basis of MFN (most favoured nation) status granted by India and Pakistan to each other, as required by the World Trade Organisation, holds great promise. It has been seen in many parts of the globe that deep animosities among nations can be overcome by trade which produces a dynamic of interdependence between people and the owners of production systems. It has often been claimed that democracies don't go to war with one another. That may be true to some extent. It can also be maintained that countries that have tied their economic systems with bilateral and regional trade agreements find it difficult to use military force to settle differences. The main line of thought to be advanced in this article is that the peace process between India and Pakistan would succeed if it is supported vigorously by trade. However, to make sure that the two countries don't use 'trade wars' as they did in the 1940s and 1950s to make political points against one another, it would be a good strategic move to fix Pakistan and India into a regional trading arrangement.

his thesis is developed in four sections in addition to the introduction and conclusion.

? Section one

looks at regionalism in trade and how the lessons learnt from the experience of other regions in the world could be applied to South Asia. ? The second section examines Pakistan's recent economic situation and explains why a leap frog strategy of growth, adopted within the context of a South Asian regional trading arrangement could help the country improve on its recent growth performance. ? The third section analyses the Indian situation and focuses on how trade in 'knowledge-intensive' goods and services is helping India turn its population into an economic asset. ? The fourth section provides in rough form the contour of the regional trading arrangement that could emerge in the region for the next one decade, say by the year 2015.

I. Why Regional Trade? Economic theory is ambivalent about regionalism- an arrangement that provides the members of a regional association preferential access to each others' markets. The purists have no time for such an approach1. They maintain that the only way to

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promote trade for individual countries is not to worry about how their partners reciprocate if they themselves open their borders. Borders not only in the developing countries but all across the world are blocked with all manner of barriers. They cover the entire gamut of restrictions governments place in the free flow of goods across their frontiers. These restrictions include tariffs, quantitative restrictions, and a vast variety of non-tariff barriers. The last category encompasses practices such as health, labour and environmental standards importers impose on the exporters. Sometimes importers also include the requirement that the products imported by them contain a certain amount of raw material that originates with them. How to dismantle these barriers? According to pure economic theory, unilateralism is the only way to proceed since the advantages of free trade are far greater than the damages they may cause.

owever, since that is not the way the world functions, purists are prepared to make room for global trading arrangements such as the one that led to the creation of the World Trade Organisation. The WTO is the second best route towards free trade. This is about as far as pure theory is prepared to go in terms of promoting global trade. It has no patience with regional trading arrangements (RTAs). But there are pragmatists who argue that in an imperfect world, regional trading arrangements (RTAs) play an important and productive role. But, argue the proponents, such arrangements must be open, they must not discriminate too much against those who are not included within their purview. Open regionalism of this type is useful for a number of reasons. To begin with, it locks in a government's commitment to lower tariffs and to the removal of other constraints against a relatively free movement of goods. Countries operating on their own can- and often do- change trade regulations in response to pressures by vested interests or to meet resource shortfalls. This has been sdone very frequently in Pakistan by a device called the SRO, issued from time to time by the Central Board of Revenue, usually in response to pressure from vested interests. Such unilateral actions are difficult to take when countries surrender some of their rights and a bit of their sovereignty to regional trading arrangements.

TAs also lead to greater foreign direct investment. Foreign investors operating within RTAs have the comfort that government policies will not change suddenly. They can also access much larger markets. They can locate their investments in one place and expect to sell their goods in a wider market. Some RTAs also tie their member countries to follow certain rules in the areas of politics, human rights, governance and the like. Mercosur- an arrangement between Argentina, Brazil, Paraguay and Uruguay- makes it incumbent upon the member countries to design their political systems in line with the basic principles of liberal, representative democracies. Any sharp deviation from this type of governance can lead to expulsion from the arrangement. It was this requirement in the treaty that originally set up Mercosur that prevented a military take-over in the perpetually troubled Paraguay in the late 1990s. When we talk about regional cooperation from Pakistan's perspective, should we talk

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only about South Asia or should we also look at other possibilities including regional alliances with the non-Arab countries of the Middle East, the Muslim countries of Central Asia, even bilateral trading and economic arrangements with China, Asia's largest and most dynamic economy? We should certainly look at all these possibilities. We will for the moment concentrate on the subject of regional cooperation in South Asia.

hree of South Asia's largest economies, Bangladesh, India and Pakistan, were once part of a single political entity- British India. It was, therefore, inevitable that even after partition, there would be considerable inter-country flow of goods and commodities. This happened, but only for a while. In 1948-49, the first full year after partition, 32 per cent of Pakistani imports came from India while India bought 56 per cent of Pakistan's exports. Fifty two years later, the situation was dramatically different. In 2000-01, India imported only 0.42 per cent of Pakistan's exports and provided only 0.13 per cent of the latter country's imports. In absolute terms, Indian exports to Pakistan in 2000-01 were valued at only US$ 186 million out of a total of US$ 44 billion. In the same year India imported only US$ 65 million worth of goods and commodities from its northern neighbour while its total imports were US$ 50 billion. While politics have obviously interfered in the conduct of trade between India and Pakistan, other countries have not done well either. South Asian intra-regional trade declined from 19 per cent in 1948-49 to 12 per cent in the early 1950s to only 2-5 per cent in recent years. These official numbers, however, underestimate the real volume of trade between the countries in the region, particularly between India and Pakistan. Estimates of illegal trade between these two countries through smuggling or through third countries (for example Singapore and Dubai) put its value at one billion dollars a year. From being major trading partners at the time of their birth, India and Pakistan now exchange very little of the goods, commodities and services they produce.

hile political quarrels between India and Pakistan have caused many problems, they are not the only reason why intra-regional trade did so poorly in South Asia. There were several other causes as well, among them the autarkic economic policies followed by all countries in the region, poor communication links among the countries and lack of complementarity in the products produced by the regional economies. Let me deal with each of these three factors. The South Asians, under the influence of Fabian socialism bought to the region by Jawaharlal Nehru, India's first prime minister, and later adopted by Prime Minister Zulfikar Ali Bhutto in Pakistan and Mujibur Rahman, Bangladesh's first president for his country, gave a large role to the South Asian state. In turn, the governments of the region pursued import substituting policies in both industry and agriculture, deemphasising export led growth that brought economic miracles to East Asia. The South Asians, having taken the decision to delink their economies, made no effort to improve intra-regional communications. This was an incredibly short sighted and

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economically self-defeating policy to adopt. The British had left a fairly well developed road and railways network that linked all parts of their large empire in India. The North Western Railway linked Karachi with Delhi and the fabled Grand Trunk Road connected Peshawar through Delhi with Calcutta. The railway and road network that was built with the NWR and the GT Road as their backbones could have been of considerable economic value had the two countries continued to develop them. That, of course, did not happen.

nd in so far as the complementarities among the regional economies are concerned, these were not sufficiently pronounced for several decades to warrant the development of strong regional trading ties. It is only in recent years, with the IT sector becoming a leading player in the Indian economy, that Bangladesh, Sri Lanka and Pakistan can begin to take advantage of what India has already achieved. Even if Pakistan and India have the political will to open their presently closed borders to inter-country trade, it would be better to do it initially in the context of a regional arrangement. Using such an arrangement will reduce the temptation for either country to use trade as a weapon of diplomacy. The time has come to build these relations on a more robust foundation.

II. Growth Strategy for Pakistan Once Pakistani policymakers begin to factor in international trade as an important determinant of development, they could adopt an entirely new strategy of growth. This strategy, as we will suggest below, would not necessarily follow those that propelled the region of East Asia and China towards relative prosperity. It would also not seek to build the knowledge-intensive export sector to the extent India has done. Instead, it could follow a strategy of its own- a kind of hybrid based on the experiences of other Asian nations. Pakistan could follow one of the three models that have been tried successfully by various Asian countries. The first of these is the model that produced the 'miracle economies' of East Asia. Also called 'tigers' and 'cubs,' these economies essentially tapped the large export markets available in the industrial world. This strategy essentially duplicated what Japan had done in the 1950s and 1960s. In following export led strategies, the industrial sectors in the miracle countries were guided by the state which identified areas for them to expand into. The industries that were being helped were almost always privately owned.

onetheless, the state not only helped industries identify markets abroad, it also got the financial sector to lend large amounts of money to the chosen industries at below market rates. In the parlance of economics this was called 'directed credit'credit provided by banks to industries at the direction of the state. This connection between industry and finance proved remarkably successful but it also led to the financial crisis of 1997-98. What came to be called 'crony capitalism'- that is how directed credit evolved- worked for a while but had to be adjusted once the financial crisis exposed its weaknesses. This has been done successfully and the East Asians are back on the high growth trajectory- something few analysts expected at the peak

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of the crisis. The other model that Pakistan could adopt was pursued by China. It focused on developing the human resource by providing all people- boys and girls, men and women, and residents in all parts of the country- with free education and health. China's human resource development occurred in an environment of authoritarian management of the economy and of the political system. Either by design or purely because of pragmatism, the Chinese, starting in the 1970s, released the enormous energies of this well educated and healthy labour by gradually loosening the political and social controls they had placed on them. First agriculture and then small scale and privately owned industries responded to these incentives. The rest, as they say, is history.

hen there is the Indian model, one aspect of which we will discuss below in some detail. What is today known as the 'Indian way' was not a well thought-out strategy initially. In fact, the explicit Indian strategy for development adopted by the country's first generation of leaders achieved a result exactly the opposite of that intended. It constrained growth rather than accelerating it. In the period between the mid 1950s and the mid 1980s, the Indian economy chugged along at what came to be called the 'Hindu rate of growth' a growth rate of some 3-3.5 per cent a year. The model being followed now is the product of a series of accidents and ad hoc decisions. It has as its foundation Prime Minister Jawaharlal Nehru's decision taken in the 1950s to set up half a dozen institutes of technology. When these institutes began to produce thousands of engineers and science graduates, there were very few employment opportunities available within the state dominated, moribund, highly inefficient and stagnant industries. A large number of graduates of the now famous IITs had to look outside India for jobs and they found thousands of them in the telecommunications, information and communication technology (ICT) industry in the West. When, in the late 1990s and the era of dotcom explosion, the U.S. industry ran into serious skill shortages, a significant part of this was met by labour imports from India. Thus the Indian Diaspora was created which in the 1980s and 1990s not only acquired great wealth but also considerable experience and expertise. Once the non-resident Indian community had become viable in terms of size, wealth, income, and expertise, it was able to help with the development of the ICT industry back in the homeland. Consequently, India's IT sector became one of the most vibrant in the world.

hat we see in India today is an economy that is being pushed forward by a growth rate which has relied very heavily on knowledge accumulation as an important contributor to growth. India's policymakers are now confident that, based on the recent transformation of the economy, they will be able to get their country to climb on to the same growth trajectory on which China is proceeding. This, in sum, is the much applauded Indian model of economic success. Looking at the future, but also looking back at the experience of the various successful

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Asian countries, what strategy should Pakistan follow? Islamabad has a menu of options available. It could use private industry to aggressively enter the export sector, exploiting the abundant financial resources now available within the reformed financial sector. This would mean following the track previously travelled by the miracle economies of East Asia. But, unfortunately for Pakistan, there is not much synergy between the structure of Pakistan's industrial sector and the nature of demand in the world's large markets. Pakistan will not be able to duplicate the experience of East Asia.

r, alternatively, Pakistan could invest massively in developing its large human resource by providing it with education, health and opportunities for skill development and knowledge accumulation. Such a strategy could work if Pakistan had the resources but more importantly the political will. When China went on that track it saved about 42 per cent of its gross national income, a proportion more than three times Pakistan's abysmally low saving rate of today. China's human resource oriented strategy produced results after two generations, or at least a generation and a half, had been sacrificed for the sake of the future. Pakistan neither has the luxury of time nor the political will on the part of its leaders to take the country through such a grind. Finally, Pakistan could follow the Indian approach of concentrating on the accumulation of skills and knowledge by one segment of the population. A small (small relatively to the size of the population but still numbering in the millions) highly skilled workforce could enter the growth niches available in the global markets. This is the strategy adopted by the first administration of President Pervez Musharraf. It was championed with great energy by the then Minister of Science and Technology, Dr. Atta-ur-Rahman. Unfortunately, it did not produce the promised results. I would advocate, instead, an approach that draws a bit on the Indian experience but then moves on an altogether different track. This two pronged approach would still emphasise knowledge and skill development as India has done so successfully. Based on a well equipped workforce, Pakistan could either export its abundant workforce or take part in the rapidly evolving 'outsourcing' opportunities that are changing the global production system. On the other track, Pakistan could become the hub of north-south and east-west commerce. The north-south track could link Central Asia, including Afghanistan, with India and points beyond. The east-west track could connect the western parts of China with the Arabian Sea through the ports of Karachi and Gwadar. These two tracks will cross in Pakistan and bring enormous benefits to the country.

or Pakistan to follow such a strategy, it will have to undertake large investments in improving the physical infrastructure- roads, railways, ports and airports. It will also need to develop its economy to supply this transit trade with the services it needs including insurance, finance, warehousing, processing, transhipment, etc. Modernisation of the service sector to facilitate such a strategy would mean focusing on creating appropriate levels of skills within the country in a number of diverse

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areas.

hat I have spelt out above is a strategy for sustained growth and development suitable for a country in Pakistan's situation. Pakistan could successfully exploit its young people to work for the skill-short sectors in the western economies. It could, at the same time, use its geography as a point of transit for two routes- new versions of the old Silk Route- that would allow commerce to flow from different parts of the world. Following this two-pronged approach, Pakistan could leap frog into the future without going through the paces of development followed by other Asian countries. But a great deal of thought and planning will need to be done to develop and implement this novel strategy. And, most important of all, for this strategy to succeed Pakistan will need to draw strength from its neighbours, particularly India, and work within the frameworks of regional trading arrangements. In the section that follows, I will examine how India has fared in the last few years after analysing how Pakistan could benefit from its neighbour's experience.

III. A Resurgent India Pakistan's rapidly improving relations with India should produce economic opportunities that could be successfully employed. One of them is in the sector of information and communications technology, or ICT, where India has begun to experience shortages of skilled workers. There are reports of reverse migrations of Indians from the United States back to their homeland. There are also reports of Indian companies entering into strategic alliances with firms in Asia in order to enter the rapidly expanding markets of the region. Could Pakistan take advantage of these developments? To answer this question, let us first look at the IT sector. The global economy, in spite of some recent hiccups, has begun to respond to some extraordinary developments in information and communication technologies. Rapid progress in electronics, telecommunications, and satellite technologies over the last two decades permit high-capacity data transmissions at a very low cost. This has brought about a quasi-neutralisation of physical distance as a barrier to communication and as a factor in economic competitiveness. As Andrew S. Grove, founder and CEO of Intel Corporation, said at a software conference in October 2003, 'from a technical and productivity standpoint, the engineer sitting 6,000 miles away might as well be in the next cubicle and on the local area network.'

t is the enormous reduction in the cost of communicating with distant places and the ease with which enormous amount of data and information can flow instantaneously that has brought about the shrinking of physical space. For instance, in 1985 the cost of sending 45 million bits of information per second over one kilometre of optical fibre was close to one hundred dollars; in 1997 it was possible to send 45,000 million bits per second at a cost of just 0.05 cents. This has led to the redefinition of the work place. Even those working on a single project, such as the architectural design of a new building, don't have to sit together or be located in adjacent offices. They can easily communicate with one another over the internet. All change is unsettling; rapid change such as the one brought about by the revolution

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in ICT has had the same effect in many different ways. Initially the fear was that this extraordinary development will produce an unbridgeable digital divide between the rich and the poor across the globe as well as within countries. This fear led the UNDP to devote the better part of its Human Development Report, published in 2001, to this subject. The authors of the report warned that unless full cognizance was taken of the adverse consequences of the spread of information technology, there was a real possibility that a couple of billion of world citizens will be condemned to live for generations within impoverished ghettos scattered all around the globe.

owever, as with most technological changes, the benefits that accrued to both individuals and countries that were quick to participate in this change far outweigh the associated costs. That notwithstanding, there is now the opposite fear, expressed by many in the United States. This concerns the possible loss of jobs to places such as India, a country that has shown the ability to turn their large and young populations into economic assets rather than burdensome liabilities. There is no doubt that under the influence of the IT revolution, the global economic system is going through a fundamental transformation. One manifestation of this is the way corporate America is linking itself with the high-technology sector of India. But those who are adversely affected initially by this link see it as a 'zero-sum' development, in which India's gain comes at the cost of America's loss. There is greater likelihood that this will prove to be a 'plus-sum' game in which both sides, India and the United States, will gain.

hy is India the most prominent beneficiary in the developing world of the ICT revolution? This question has many answers; of which two provide a clue to what is happening in that country. One, India's great success in the ICT sector, particularly as an exporter, is owed in part to a decision taken half a century ago by Jawaharlal Nehru, the country's first prime minister. When Washington decided that the imperatives of the cold war required it to provide large amounts of economic and technical assistance to South Asia, Nehru asked for the establishment of institutions patterned after the MIT. This initiative led to the founding of the Indian Institutes of Technology at six different locations. The IITs now have the well-earned reputation of producing world class engineers and scientists. However, these institutions served only a small segment of the country's vast population. Last year, for instance, they accepted only 3,500 of 178,000 persons who applied for admission. Very wisely, the Indian government, drawing a lesson from the success of the IITs, replicated them within the large public sector. While the IITs became institutions of excellence, the entire public sector geared itself to train tens of thousands of scientists and engineers. Consequently, India now produces 3.1 million college graduates a year, a number that is expected to double by 2010. The number of engineering colleges is expected to grow 50 per cent, to nearly 1,600 in four years. Not all the graduates are qualified to do world class work which is the reason why there is a movement to improve the quality of teaching by offering much higher salaries. Indians living abroad are also helping. The non-resident Indians (NRIs) in the United States have teamed with Wharton School and

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Northwestern University's Kellog Graduate School to found a new Indian School of Business at Hyderabad.

he second reason for India's attraction as a destination for corporate back-office work is the play on what economists call 'wage-arbitrage.' This is the difference in the cost of labor in the developed and developing countries for doing the same kind of work. To take one example: it is estimated that this year the tax returns of some 20,000 were prepared in India, a number set to increase tenfold, to 200,000 next year. An Indian accountant charges US$ 500 a month for this work which is equal to the amount paid for a single day by an American preparing the same tax return. The Indians have been able to forge alliances with corporate America that have brought enough employment opportunities to the country to accommodate a significant number of graduates from technology institutions. By some estimates, at least one-third of new IT development work for big U.S. companies is done overseas, with India the biggest site. By 2008, forecasts McKinsey, the consulting firm, IT services and back-office work in India will increase five-fold, to a US$ 57 billion annual export industry employing four million people and accounting for 7 per cent of the country's gross domestic product. While India has succeeded, is there place for other countries with young populations for obtaining similar benefits from the rapidly changing structure of the global economy? A large part of the increment to global output will be in the knowledgeintensive service sector. Manufacturing in developed countries accounts for just 14 per cent of output and 11 per cent of jobs. It is in this part of the economy that initial outsourcing occurred and East Asia and China were the main beneficiaries of that development. The service sector accounts for 60 per cent of the output of developed economies and more than two-thirds of employment. It is in this part of the economy that the Indians have taken a share. But the sector is large and there is space for other developing countries. Consider one developed country and one part of the knowledge-intensive service sector. The output of America's IT sector is estimated at US$ 240 billion. It is growing at a rate of more than 8 per cent a year. Indians, with exports to the U.S. of about US$ 7 billion, still have less than three per cent share in the market.

hat are the lessons available to other developing countries from the Indian experience? There are at least four and the most important of these is to rapidly develop tertiary education. Second, to boost government spending on research and development, which is quite properly the province of government. Third, provide public funding for graduate science and engineering students. Fourth, develop financial markets so that new technology can be financed by institutions such as Venture Capital Firms or through instruments such as high-yield bonds and initial public offerings. These lessons would be transmitted more readily within the context of a regional trading arrangement in which the Indian IT sector becomes a major player.

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IV. A South Asian Regional Arrangement One way of promoting trade relations with India is to do it within the context of a regional arrangement. That could be one way of overcoming the enormous suspicion that exists on both sides of the border. This suspicion cannot be suddenly willed away in a season. Working with India within the regional context may be a good way to start.

outh Asia has already paid a heavy price for not taking the regional route. In the late 1950s, when economic development was adopted as a major goal by all developing countries, South Asia and East Asia were at about the same stage of development. In the early years of the 21st century, the latter region has left the former behind by a very wide margin. In terms of average incomes of the citizens of the two regions, East Asia is about ten times richer than South Asia. Even if we assume that better regional cooperation would have added, on average, one percentage point of growth to the South Asian regional output, the combined GDP of South Asia today would be at least 70 per cent higher. This would have translated into an equivalent increase in per capita income and a considerable decline in the number of people living in poverty. It would not be an exaggeration to say that a significant part of the persistence of poverty in South Asia can be attributed to the lack of economic cooperation among the countries of the region. Another way of assessing the benefits of closer economic cooperation among the countries in the area is to look at the impact of open trade between India and Pakistan, the region's two largest economies. A study prepared for the World Bank in 1993 estimated that free exchange of goods and commodities between India and Pakistan would have resulted in a nine-fold increase in the flow of trade between them over a period of five to ten years. Simply removing the import bans the two countries have placed on their exports to one another could bring enormous gain to both sides. For instance, granting each other the 'most favoured nation' status but still maintaining a 50 per cent tariff would increase the volume of trade between the two countries by a factor of three. As a member of the World Trade Organisation, Pakistan is supposed to grant the 'most favoured nation' treatment to India. This has not been done while India has extended this benefit to Pakistan. An MFN status would help to remove some of the distortions that exist in the flow of trade between the two countries. But such a move would still be within the context of bilateral relations. To go beyond that and cast relations within a regional context, policymakers in Islamabad may begin to focus their attention on the areas in which such an arrangement could work.

here are four areas in particular in which regional economic cooperation holds considerable promise. They are information technology, energy, water, and research and development. Let us look at each of these in turn. India, along with Israel and Ireland- the three 'Is'- are now major players in the global IT sector. As discussed in a previous section, India has already carved out a

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significant place for itself in the world in this sector. There are many ways smaller countries of South Asia could benefit from the enormous advances India has made. Institutions providing training in IT could get affiliated with the well-known and highly developed science and technology centre in India. Fledging IT companies in Bangladesh, Pakistan and Sri Lanka could form strategic alliances with the larger companies in India. Even though India has a very large population and thousands of IT graduates are produced by the training centres in the country, there are some labour shortages that could be met by the skilled workforces from other countries. There are many other opportunities in the IT sector that could be exploited. There are even more opportunities available in the sector of energy. Of all the major economies on the mainland of South Asia, India is the most deficient in energy and the existing gap between demand and supply will expand as the economy continues to grow. What are the options available to India for closing the gap? Currently, oil and gas constitute 63 per cent of India's primary energy consumption. According to one estimate, oil demand will increase from 1.9 million barrels per day to 4.9 million by 2020, an annual rate of growth of 4.6 per cent a year, slightly less than the expected rate of increase in GDP. Two thirds of oil and consumption is now met from imports. This places a very heavy burden on the Indian economy which could be lessened somewhat by importing cheaper electric power and natural gas from a number of countries in the neighbourhood that have deliverable surpluses.

akistan is one source of energy India could tap. Both the structure of supply and demand for energy are very different in Pakistan compared to that in India. Gas is by far the most important source of energy supply in the country; 32 per cent of electricity is generated by this fuel. An additional 25 per cent of electricity comes from hydel power. Pakistan has the potential to increase both the supply of gas and hydel power well beyond even the more optimistic projections of increase in domestic demand. Some 100 undeveloped dam sites have been identified by various groups of experts which could generate an additional 35,000 MW of electricity. The country also has coal reserves of 185 billion tons, the second largest deposit in South Asia. China, which produces a significant amount of electricity from coal and where coal still accounts for 80 per cent of electric power generation, is helping Pakistan to develop coal-powered electric generation. Once developed, this would add to the surplus of power Pakistan will have available for sale. Pakistan, in other words, could become a major supplier of energy to the northwestern states of India. This won't happen unless India and Pakistan shed mutual suspicion. This is more likely to occur in the context of formal agreements for regional cooperation. Such an arrangement could also facilitate the supply of the Bangladeshi natural gas to India's north eastern states and hydel power produced by Nepal to the same parts of India.

t is as a transit country for the gas flowing either from Iran or from Turkmenistan to India that Pakistan could draw the most benefit from a regional arrangement in

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South Asia. Take the proposed pipeline between Iran and India as an example of the benefits that could accrue to the two countries. A study by Reliance Industries, India's largest private sector corporation, has concluded that such a pipeline would halve natural gas prices in India while Pakistan could collect as much as $500 million annual fees for allowing and managing the transit of this fuel.

f the countries in the South Asian region mustered enough political will and dispensed with some of the suspicions that have marked the relations among them- in particular between India and Pakistan- it is not beyond the realm of possibility to foresee the development of various kinds of energy grids in the area. Bangladesh, India, Nepal and Pakistan in South Asia along with Afghanistan and the Central Asian states could be connected with one another by a network of electric, gas and oil grids that would bring enormous benefits to all of them. Water is the third area in which regional cooperation among the countries in South Asia would be enormously beneficial. This is particularly true for Pakistan which receives 40 per cent of its water from outside the country, the highest figure in the region after Bangladesh. Per capita consumption of water in Pakistan is also much more than the regional average. This is because of the extensive use of irrigation for agriculture- Pakistan has the world's largest contiguous irrigated area in the world. For this reason, the country is the 14th highest consumer of water in per capita terms in the world and the consumption is likely to increase as population continues to grow, as cities continue to expand and the economy continues to modernise. On the supply side there are now severe limitations on tapping domestic resources. Ground water development is reaching its limit. Tube wells are being dug deeper and deeper, mining the underground reservoir. If this continues for long, the impact on the economy and the environment could be severe.

new water-sharing arrangement with India could help to alleviate some of the problems since Pakistan's neighbour is also running into the same kinds of shortages and is tempted to exploit the water available in the disputed state of Kashmir. It is now recognised that without technological growth, economies cannot become efficient and worker productivity cannot increase. Without a significant increase in productivity the incomes earned by the working poor would not grow at a rate significantly high to pull them out of poverty. Are there opportunities available in the various countries of South Asia that could be exploited in order to benefit the entire regional population? The answer is yes. India has the most developed educational and technological base in the region which could serve other countries in the area. Its science and technology schools have attained world status. But Pakistan also has the capacity to develop institutions specialising in irrigation, engineering, textiles, food preparation, and health sciences that could benefit India and other countries in the region. Models for such cooperation already exist in other parts of the world. There are other areas in which collaboration could occur among the South Asian countries other than the four

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we have mentioned above.

V. Conclusion At the time of the Islamabad summit, the seven SAARC nations agreed to work towards the creation of a Free Trade Area in South Asia. They set themselves the target of 2007 by which time the South Asian Free Trade Area, or SAFTA, will come into force, allowing goods and commodities to move freely among the countries in the region. This is a good move since the trade track holds the greatest promise for bringing about peace in the South Asian subcontinent. There are plenty of examples around the world to suggest that deep animosities among nations can be dissolved once trade begins to move freely.

his happened, of course, in Europe which, after two catastrophic wars in the twentieth century, is now a zone of peace. This also happened in the Mercosur, a trading arrangement among the nations in the southern cone of South America. The countries in this area had fought several wars and they continued to view one another with deep suspicion for a very long time. The birth of Mercosur helped to change this mind set. In fact, the warming of relations between Argentina and Brazil, the area's two largest economies, ultimately led to both sides giving up their nuclear ambitions. The same can be said to be true for the North American Free Trade Area that has brought Mexico closer to the United States and is likely to stay that way in spite of the uneven progress made by the trading arrangement during its first ten years.

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with India would accomplish that. ould these two motives be aligned in some way that they begin to be seen as a part of a plus-sum game in which neither side loses and both sides gain? That could happen if the building of trade between the countries- rather than solving the Kashmir problem- is placed at the centre of the evolving dĂŠtente.

(Shahid Javed Burki is currently the CEO of Emerging Markets Partnership Financial Advisors; a Washington based consulting firm. Before joining the EMP-FA he was with the World Bank for 25 years as Director China and Mongolia Department (1987-1994) and Vice President Latin America and the Caribbean (1994-1999).

End Notes 1. The most articulate exponent is the Indian economist Jagdish Bhagwati, who has written extensively on the subject of regional trade and why it would hinder the development of true multilateralism in trade. See Bhagwati, 1998.

In what way should SAFTA evolve? In working out a plan for its development and evolution, how carefully should the founding countries look at the experience of other successful regional trading arrangements? What are the lessons that could be drawn from what has happened in other parts of the world? How much focus should be placed on moving beyond trade to other issues that have stood in the way of regional integration in South Asia?

istorians of deep conflicts between nations tell us that accommodation can be reached once the motives for doing so begin to coincide. The resolution of the sharp animosity between Germany and France occurred when the two countries recognised that they would gain enormously if they lifted their sights beyond narrow national interests and started to focus, instead, on the economic future of continental Europe. Once that happened, the rest was easy. Unfortunately, India's and Pakistan's motives are different in seeking come kind of accommodation. Of the many different motives that are propelling the two countries to seek rapprochement, two are compelling. On the Indian side, the ongoing conflict with Pakistan is a major distraction in its quest for global play. The Bharatiya Janata Party (BJP) leaders have begun to recognise that they cannot place India on the global map as a world player for as long as it remains entangled with Pakistan. On the other side of the border, President Musharraf has begun to appreciate how big a menace the rise of Islamic fundamentalism and jihadi groups has become. The two assassination attempts on him in December 2003 seem to have convinced him to focus on eliminating one of the reasons that provides these groups their raison d'etre. Peace

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political participation and violence, for instance, the definitional categorisation, level of data availability, and its periodicity, are all very varied across the different South Asian countries and therefore, an average taken for the region as a whole can be questionable if attempted. In such cases, individual country level analysis is undertaken.

Women And Development In South Asia Dr Preet Rustagi

I. Introduction Women as a category and South Asia as a region for analysis brings up the issue of heterogeneity vs. homogeneity (Stromquist, 1998; Agarwal, 1996; HDSA, 2000). South Asian women and their status is being assessed in this paper to highlight the similarities in the conditions faced by women across the region, despite the diversities stemming from class, religion, culture and locality. This assessment is undertaken on the basis of a select set of quantitative indicators regarding their work, survival, health, education and political participation. The issues considered here to highlight the gender inequalities that constrain women from their legitimate claims to participate in and benefit from development in South Asian countries are limited by the availability of data1, quantifiability and comparability across countries.

outh Asia comprises seven different sovereign nations2, with diverse socio-cultural and ethnic populations, a range of religious faiths, legal frames, economic and political forces, all of which impact upon the lives of women in the region. Within these diversities, the region stands together on a number of counts and the women of South Asia too, face similar conditions on various fronts. South Asia is a highly populated, agriculture dependent, poor income region, often identified as the most deprived region in the world (HDSA, 1997). The region is also recognised as a 'patriarchal belt' (Caldwell, 1982), where women are subordinated to men in a kinordered social structure (Mathema, 1998), have low status, little or no access to property and land3 (Bardhan, 1986) and suffer from non-recognition of their work which is largely unpaid. Socio-cultural practices, based on a strong patriarchal ideology prevalent in the region, curtail women's mobility and prevent them from utilising opportunities to enhance capabilities. Not all the spheres of gender discrimination are quantifiable, but even within the limited arenas of labour markets, socio-cultural influences on education, nutrition, health and political participation, women in most of the South Asian countries face unequal treatment. Since our emphasis here is to deal with the aspects of gender inequalities based on quantitative indicators, certain equal, if not more critical, dimensions, such as violence against women or the influence of legal institutions, are not dealt with.

ggregation of the situation of women in South Asia is feasible in quantitative terms only in certain spheres, as in the case of sex ratios, education, child mortality, fertility rates and so on. In other dimensions such as work participation,

Since 1975, coinciding with various international efforts, most of the South Asian countries have also intensified their respective country level endeavours to assess the status of women, comprehend the nature of gender inequalities and introduce institutional mechanisms to enable movement towards equality. By the end of the twentieth century, gender equality and empowerment have become accepted norms in any discussion on development. The gender-neutral approaches hitherto adopted have been questioned by the recognition of the asymmetrical impact of development and poverty on women and men. Gender inequality is a global phenomenon, with variations only in terms of degrees of discrimination and biases against women (UNDP, 1995).

quality refers to equal opportunities in terms of access to sources of livelihood, health, and education, as well as to social, economic and political participation without discrimination. Gender inequalities stem from relations of power and authority, class-religion-caste-ethnic hierarchies and socio-cultural traditions, customs and norms (Kabeer, 1994; Carr, et al., 1996). Empowerment is the process of transforming these structures and institutions, thereby ensuring equality. Over the years, in a number of well being indicators, South Asian women are seen to be better off today than they were a few decades ago- their survival in terms of life expectancy has been improving; more women are educated and working; many of them have entered politics at least at the local governance levels and there is an increasing recognition of the need to address women's issues specifically, to understand gender relations and work towards equality and empowerment for women. Despite these improvements, the aggregate picture of women's development reflected in the quantitative indicators in any of these spheres, reveals that the journey has only begun and there are many more processes that require transformation4.

ollowing this introduction, section II focuses upon the issues relating to women's work, its non-recognition and the nature of economic participation of the South Asian countries. Predominance of male preference and the gender biases in nutrition, and health care which impact the survival of girls and women, are dealt with in section III. The overwhelming emphasis on women's reproductive roles to the utter neglect of their other health concerns and its impact on their well-being is discussed in the fourth section. The educational poverty in most of South Asia, especially the gender biases prevalent and the influence of socio-cultural constructs of women on their access to and enhancement of capabilities is dealt with in the fifth section. The sixth section provides for the role of women in South Asian politics. The inroads made by the positive interventionist efforts of reservation for women and the need for it is

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highlighted. Finally, some concluding remarks are made to emphasise the need for working towards changing mindsets and perceptions that influence the institutional structures and their functioning, towards elimination of gender inequalities in the region.

II. Women's Work Women in South Asia- a predominantly agricultural and tradition-bound regionparticipate in economic activities and contribute their labour actively. Yet, due to the nature of their work- which is intertwined with household activities at times and is often unpaid- and the flawed definition of economic activity, their economic participation remains statistically invisible. The role played by women in the care sector, predominantly their reproductive work (bearing, rearing, nurturing children and household maintenance), falls outside the national accounting systems followed by different countries. While these activities are crucial for household members' well-being and effective participation in different spheres- economic, social and political, they continue to remain non-economic activities. By virtue of women performing these roles which are statistically not counted as economic and hence not monetarily valued, women's roles and their contribution are assigned a lower status. Women's contribution in activities that are recognised by definition as economic activities also remains unrecognised and non-enumerated. This is due to cultural and traditional values which constrain recognition of women's economic participation. In the South Asian countries, the historical gender roles, spaces and stereotypes of the 'public' male breadwinner (provider) and 'private' female care-giver are espoused even under changing situations. This is due to the association of household status with women's non-work that has been perpetuated by the circumstances of women having to offer their labour in the paid market work spheres under extreme economic stress and poverty.

espite the conceptual, methodological and definitional flaws, statistics on women's work from the respective national data sources reveal nearly one-third participation of women in the labour-force. Maldives and Pakistan are the two countries where the female percentage of labour-force is relatively low, while in Bangladesh and Nepal the share of women labour-force is higher compared to other countries in the region (see Table 1). The region as a whole has been witnessing rising levels of women's economic participation over the years. The factors that have aided or influenced these trends differ from country to country. Nevertheless, the characteristics of women's labour, in terms of the nature of tasks undertaken and the wages earned, remain by and large unchanged. The majority of women are undertaking manual, non-mechanised, low or unpaid tasks. Even among those entering the paid labour market, women face gender discrimination in access to jobs, and gender inequalities in pay and job security. An overwhelming majority of economically active women in Nepal and India work in

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agriculture (see Table 2). In Sri Lanka, where agriculture is the main life supporting sector for rural populations, women are involved extensively in the plantation sector (Weerahewa and Ariyawardana, 2003). Rural women in South Asia participate in crop farming, animal husbandry and a host of off-farm activities. A substantial amount of time is spent by South Asian women in looking after livestock- from rearing to protecting animals, finding and collecting fodder and water, collecting eggs, milking, ensuring the health of animals, poultry, etc. Table 1: Sectoral Distribution of Labourforce in South Asia Country

India Pakistan Bangladesh Nepal Sri Lanka Bhutan Maldives

Percentage Labour Force in Agriculture 62 47 59 93 49 92 25

Industry

Percentage of Female Workers

Services 11 20 13 1 21 3 32

27 33 28 6 30 5 43

32 27 42 40 36 32 22

Source: HDSA, 1997, 2000.

y and large, among the secondary sector activities of industry, manufacturing and so on, women's enumeration is low as seen in Table 2. Sri Lanka and Bangladesh have a relatively higher share of women's employment in the secondary sector. Sri Lanka began its phase of trade liberalisation and export oriented growth as early as 1977. The nature of these industries and the additional labour demand generated therein facilitated entry of women workers. Bangladesh has recently embarked on industry-led growth policies specially in such areas as garments. While this thrust has led to South Asia becoming one of the world's largest exporters of textiles (with India, Sri Lanka and Bangladesh), the work and pay conditions are no better than sweatshops (see Unni, 2001). Table 2: Sectoral Employment in South Asia by Sex (Percentage) Country Bangladesh (1996) India (1994) Nepal (1996) Pakistan (1997) Sri lanka (1995)

Sex* Male Female Male Female Male Female Male Female Male Female

Agriculture 53.9 41.7 58.3 78.0 78.9 93.7 40.7 66.4 35.4 41.5

Industry

Service 19.2 27.8 16.5 10.9 4.9 1.4 20.2 10.6 28.2 30.8

26.8 30.5 25.2 11.1 13.2 4.5 39.0 23.2 36.4 27.7

*For each country male figures are percentages of male labourforce and female figures are percentages of female labourforce. Source: Respective labour force surveys of the countries; cited in HDSA, 2000.

The majority of South Asian women work in the informal sector or as unpaid family helpers. Among the economically active women workers in India, 96 per cent are in the unorganised sector. In Nepal, 75.3 per cent are self-employed and 28 per cent are unpaid family members. In Pakistan, 65 per cent of the female labour-force that is

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officially enumerated is in the informal sector. The percentage of women earning a living in the informal sector in Bangladesh in 1995-96 was 75 per cent (HDSA 2000). Women workers are in demand for their docility, lower probability of organising or fighting for better wages and work conditions. The patriarchal norms that are prevalent make it easier to manage women as workers. Women's participation, although increasing in South Asia, still accounts for the smallest percentage of formal sector employment. Even here women occupy the lower rungs of clerical and low-skilled occupations. The lower levels of literacy and skill/training among women in South Asia are often blamed for their placement in the lower echelons.

omen are often occupied in community, social and personal services. In India, 57 per cent of women in formal sector fall in this employment category, while the share is 59 per cent in Bangladesh (see Table 2). Despite Sri Lankan women being more professionally qualified, their higher labour market participation does not show signs of breaking the proverbial 'glass-ceiling' and many of them are unemployed (Jayaweera and Sanmugam, 2002; Aturupane, 1996; Alailima. 1998). To encourage women's participation, some of the South Asian countries have introduced policies of reservation in government jobs. In Bangladesh, 10-15 per cent and in Pakistan, 20 per cent government jobs are reserved for women. However, the extension of women's work spheres into paid categories without an adjustment or radical change in the sharing of household responsibilities is an added stress on them. Unless women have control over their earnings and the power to decide how they spend their incomes, the benefits in terms of empowerment will remain limited. Some studies have found that working women tend to spend their resources more judiciously on children's nutrition and household concerns as opposed to their male counterparts who are often noted to be frivolous by using their incomes on commodities of personal gratification (Hoddinott, 1992; Kabeer, 1994). At the same time it is important to note that women's work status certainly provides them the opportunity to wield relatively more space within household structures, especially when their income becomes important for the family and the fulfillment of their needs are dependent on it. Even in terms of mobility that is otherwise restricted for women in patriarchal societies, employment provides the desirable opportunity to interact with others and operate in 'public' domains, traits which can be substantially empowering in certain contexts. The recognition of women's economic 'worth' can also help in improving the survival of girls.

III. Survival Issues The strong presence of traditional values and perceptions in South Asia, wherein the role and status of women are assigned lower significance, reflects in the demographic balance as well. As opposed to the global sex ratio of 106 women per 100 men, South Asia is one of the few regions (other than China and parts of the Arab world) where the proportion of women to men is lower- only 94 women per 100 men in the

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population.

elatively balanced sex ratios are recorded for Sri Lanka and Nepal while Pakistan, India and Maldives have a lower proportion of females in their populations (see Table 3). In India, where the sex ratios have been declining especially among the younger age cohorts, practices of female infanticide and foeticide to prevent the birth of girls have been noted in some parts of the country (see George, et al., 1992; Agnihotri, 2000 among many others). The introduction and ease of access to pre-natal screening methods such as ultrasonography and amniocentesus technologies that can help detect the sex of the foetus are being used to selectively abort female foetuses. Table 3: Survival Indicators for South Asia Gross Domestic Product per capita 4798 3180 2840 1833 1610 1310 1890 2730

Country/Region

Maldives Sri Lanka India Bhutan Bangladesh Nepal Pakistan South Asia

Sex Ratio (Females per 100 males) 93 102 94 98 95 100 92 94

Female Life Expectancy at Birth

Female Child Mortality Rate

66 76 64 64 61 59 60 -

80 20 97 94 116 124 104 99

Female to Male Child Mortality Rate 1.51 0.91 1.18 0.96 1.09 1.13 0.96 1.14

Source: HDSA 2000; HDR 2003; for col.4 and 5 UNFPA, 1999.

Analyses of the causes leading to such demographic imbalances, ever since these trends were observed in South Asian countries, have exposed the strong son preference traits. The trend of declining sex ratios witnessed despite reduction in mortality rates has led researchers to examine other variables such as sex ratios at birth, gender differentials in nutrition and extent of gender variations in mortality rates among populations belonging to different age cohorts. Linkages have been examined in many of the South Asian countries between fertility rates, contraceptive use, abortion and sex preference even in Nepal and Bangladesh where the imbalance is not so pronounced (Arnold, 2001; Karki, 1992; Leone, et al., 2003; Bairagi, 2001 among others).

he reasons for son preference stem from patrilineal and religious structures that lay emphasis on the role and significance of male offsprings. Property transfers, ritual functions, the family heir who carries the name of the household etc., leads to the desire of having one or more sons in every household. In the context of declining fertility rates and smaller family size becoming desirable, the pressure to give birth to a male offspring further worsens the condition of women's health and their status. Frequent child bearing and the exposure of women's bodies to a host of tests take a toll on their health. Since women are held responsible for childbirth, failure to produce a male child becomes a cause for violence, abuse and torture against them. Even when girls are born, they are discriminated against in a number of ways (UN,

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1998; Miller, 1981; UN Secretariat, 1988). Neglect and lack of adequate care in feeding girls, looking after their nutrition and health, are noted in a number of studies revealing the gender discriminatory practices in South Asia. These are mostly an outcome of the lower status assigned to women (Basu, 1992).

mprovements in life expectancy and reduction of mortality rates are noted in all the South Asian countries over the quarter century 1975 to 2000 (HDR 2003). Yet, as compared to male child mortality rates, the female child mortality rates are higher revealing excess female mortality among under-5 age groups. The female to male ratio is above 1 in four countries - Maldives, India, Nepal and Bangladesh. By far the best performance among the survival indicators is witnessed in the case of Sri Lanka (see Table 3). Consideration of three survival dimensions using sex ratios, child mortality and life expectancy display discrepancies in ordering of different countries. Nepal has a more balanced sex ratio, but the worst life expectancy and child mortality rates among females. The survival indicators seem to have a stronger association with the income levels of the countries, especially the life expectancy and infant mortality levels. However, the sex ratios and gender disparity in mortality do not display a similar correlation, highlighting the influence of gender ideologies which discriminate against girls, irrespective of income development levels of the countries.

IV. Health Concerns The overall lower status of women in South Asia influences their health status too. Lack of access to resources, poor decision making power or control, low recognition of their work i.e., low economic worth, and their social position as subservient to males or other household members, places their health requirements at a low priority. In fact, often these health needs are not realised or articulated by the women themselves. Their low self-esteem and their socialisation into 'non-entities' prevent them from such articulation. The emphasis laid on women's marriage reiterates the stress on their reproductive roles, undermining all other spheres of human development. In South Asian countries, marriages are traditionally carried out at early ages with little choice/option given to women. The governments of most South Asian countries are actively working towards preventing child marriages and pushing the minimum age at marriage up for girls. Bangladesh, India and Bhutan have stipulated the legal minimum age at marriage at 18 years, yet many marriages do occur before girls attain the legal minimum age. (HDSA, 2000).

arly marriage along with young age pregnancies compounded by poor health and economic poverty puts undue stress on women's bodies (Hartmann and Standing, 1989). A majority of South Asian pregnant women suffer from anaemia (see Table 4). The total fertility rate (TFR) has been declining over the last three decades, but still continues to be quite high in Maldives, Pakistan, Bhutan and Nepal.

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The most significant decline in TFR is witnessed for Bangladesh, India and Sri Lanka (see Table 4). Table 4: Some Health Indicators for South Asia

Country/Region

Total Fertility Rate

1970-75 2000-2005 Maldives 7.0 5.3 Sri Lanka 4.1 2.0 India 5.4 3.0 Bhutan 5.9 5.0 Bangladesh 6.2 3.5 Nepal 5.8 4.3 Pakistan 6.3 5.1 South Asia 5.6 3.3 Source: HDR 2003; HDSA 2000.

% of Pregnant Women with Anaemia 62 60 72 73 58 75 45 -

Birth Attended by Skilled Personnel 70 97 43 15 12 11 20 36

Health Expenditure as % of GDP Public 6.3 1.8 0.9 3.7 1.5 1.6 0.9 -

Private 1.3 1.9 4.0 0.4 2.6 3.6 3.2 -

aternal mortality rates are quite high in the region (HDSA, 2000). The probability of women not surviving childbirth is further aggravated by a large proportion of them having non-institutional deliveries, unaided by skilled personnel. Only 36 per cent of South Asian babies are born with the assistance of skilled personnel (see Table 4). In Sri Lanka and Maldives, the situation is relatively better compared to other South Asian countries. The cultural basis of women's status and their perception of low self-worth in the tradition-bound South Asian countries results in discriminatory practices beginning from basic nutrition to accessing health care. HDSA, 1997 notes that half of the children living in the region are malnourished, 260 million people lack access to rudimentary health facilities and over 400 million go hungry every day. The lack of adequate public health services acts as a constraint for women to access such services (Baru, 2003; Gopalan and Shiva, 2000). Given the levels of poverty in South Asia, home to nearly 40 per cent of the world's poor (HDSA, 1997), the accessibility of private paid health services among women is likely to be limited, since their needs are not considered to be important. There is very often excessive concentration on reproductive health to the utter neglect of other health concerns of women in government policies (see Qadeer, 1998; Datta, 2003). Other areas which have not been researched adequately and lack data are women's mental health and sexuality.

V. Education The importance of education for human development as well as women's empowerment as a core dimension is well accepted, even in South Asia. Sri Lanka and Maldives are among the best performing countries in the region. However, the gender biases at higher educational levels, in professional courses or in nontraditional subjects are visible even among these countries (Jayaweera and Sanmugam, 2002; HDSA 2000). The adult literacy rate (ALR) for the population above 15 years has been improving

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over the years. Even over the last decade from 1990 to 2001, ALR has increased from 48 to 56 (see Table 5). However, this rate is low compared to even developing countries, where the ALR was 75 per cent in 2001. The literacy rate for the youth (refers to population in the age cohort of 15 to 24 years) in all South Asian countries shows positive trends, reflecting inter-generational improvements. In South Asia, the youth literacy rate is 71 per cent.

here is a definite improvement in literacy levels among females across South Asian countries. Some countries, such as Maldives and Sri Lanka have achieved remarkable literacy levels among females. Gender disparity levels both in literacy and enrolment ratios are negligible in these two countries (see Table 6). However, gender gaps in literacy are high in Nepal, Pakistan, and India. Table 5: Adult and Youth Literacy Rates for South Asia 1990 and 2001 Country/Region

Maldives Sri Lanka India Bhutan Bangladesh Nepal Pakistan South Asia Developing Countries Source: HDR 2003.

Adult Literacy Rate % (15 years and above) 1990 2001 94.8 97.0 86.7 91.9 49.3 58.0 34.2 40.6 30.4 42.9 35.4 44.0 47.7 56.3 67.2 74.5

Youth Lit eracy Rate % (15-24 years) 1990 2001 98.1 99.1 95.1 96.9 64.3 73.3 42.0 49.1 46.6 61.6 47.4 57.8 61.7 70.6 81.1 84.8

Table 6: Adult Literacy Rate and Gross Enrolment Ratio by Gender Country

Adult Literacy Rate Gender Gap Female Male Maldives 96.9 97.1 0.2 Sri Lanka 89.3 94.5 5.2 India 46.4 69.0 22.6 Bangladesh 30.8 49.9 19.1 Nepal 25.2 60.5 35.3 Pakistan 28.8 58.2 29.4 Source: HDR 2003; Gap calculated from Col.1 and 2.

Gross Enrolment Ratio Female Male 79 78 64 63 49 63 54 54 57 70 27 45

he one statistic which poses a cause for concern in the South Asian context is the large proportion of women among illiterates. The tradition based stereotypes and role demarcation for women are strongly prevalent in most South Asian countries. Given the social ordering along patrilineal- patrilocal families, women are married out and investing in their education is not perceived as a priority. Among resource constrained households, often educational costs are strategically borne for the male child while depriving the girl sibling (Khan, 1993). The role of women is associated with their reproductive functions, to the detriment of their own personal and educational development as human beings. These attitudes and perceptions based on socio-cultural and economic factors constitute the demand side constraints to women's education.

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On the supply side, factors such as inadequate investment, lack of infrastructure, schools, teachers (especially female teachers) etc., reflect the state's commitment and impinge on the levels of accessability. In most of the countries of South Asia, average years of schooling are quite low- 6 years for girls and 8 years for boys.

n an effort to improve this situation, a number of countries in the region have stressed upon free and compulsory primary education and put emphasis on enrolment and retention of girls in schools. Various incentive schemes such as scholarships for girls, free school meals (in India, Bangladesh and Nepal) and separate schools for girls in each Thana (Bangladesh) have been started (HDSA 2000). Efforts have also been made to increase female teachers in schools. There is still a long way to go to achieve universal literacy goals and eliminate gender discrimination in these societies. The effort will have to be on both ends- at the state level to ease supply side constraints based on local knowledge of the nature of gender specific inequalities that are prevalent, and at the household or social level to tackle the demand side hurdles posed for women's educational attainments.

VI. Political Participation The region of South Asia has had the largest number of women leaders who have been heads of the nation (Indira Gandhi, Sheikh Hasina, Benazir Bhutto, Srimavo Bandaranaike and Chandrika Kumaratunga). The first female head of any nation in the world, as early as in 1960, was from South Asia, in Sri Lanka. The general level of political participation among the South Asian women does not reflect similar trends. Even in pockets where the political awareness among women may be higher, their actual participation is often limited by the constraints laid on their mobility and roles based on the socio-cultural perceptions. Therefore, in spite of the visibility of women at the higher echelons of government, the overall public participation of women remains low for the region (see Table 7). There is no data on female membership for most political parties and only a few of them are given tickets to stand for elections. The experience of India's amendment to its Constitution (the 73rd and 74th Amendments introduced in 1992), reserving one-third seats for women in its local governance structures, generated tremendous interest in the other countries of the region. In 1997, both Nepal and Bangladesh introduced women's reservation in local bodies. While it was 20 per cent in Nepal, in the case of Bangladesh it was one-third seats in all four tiers of local government. In Pakistan also, one-third seats are reserved in local bodies, which is visible in the current figures of women's political participation.

s an outcome of women's movements in many of the South Asian countries, the demand for positive intervention in the form of reservation of seats for women in the governance structures, has been met to some extent. This policy has clearly assisted women's participation, which would have been denied given the deep-rooted patriarchal traditions wherein men wield power.

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Table 7: Women in Parliament (%) Country/Region Maldives Sri Lanka India Bhutan Bangladesh Nepal Pakistan Source: HDR 2003.

development indicators, work, employment and institutions; and crimes against women).

Percentage Women 6.0 4.4 9.3 9.3 2.0 7.9 20.6

Prior to the phase of recognising the need for reserving seats for women, there was an assumption about women's passivity regarding their interest in, and understanding of, political matters. Subsequent to the amendments and provisions being made, the debates have focused extensively on the inabilities of women, given their illiteracy and lack of understanding regarding political matters (Mazumdar, et al., 2001). In India, as elsewhere, there is substantial propaganda against such reservation on the pretext of misuse (Buch, 2000; ISS, different years). Women also face a backlash in the form of violence, since they are seen as altering the power equation and challenging the status quo.

VII. Concluding Remarks The situation of South Asian women as seen by the set of quantifiable indicators of gender development reflects the improvements being made in a number of spheres with regard to work, mortality, health, education and political participation. The constraints faced by women in South Asia are not merely economic or poverty related but emphasise the prevalence of deep-rooted gender ideologies that operate through various institutions and prevent women from enjoying an equal status in different spheres of their lives. Among the many efforts being made at international, regional and national levels to move towards gender equality, the highlighting of the levels of biases that prevail through the use of human development indicators, is one prominent tool. This provides insights into the specific approaches required to address the gender discrimination experienced by women and can help in the process of policymaking.

he added dimension to be noted is that of the nature of gender inequalities which are rooted in the structures and institutions, and these aspects are not always amenable to quantification. The perceptional and attitudinal biases against women operational in the social context, as well as in the market and state institutions, need to be identified, understood and appropriately tackled. Along with generating awareness regarding gender issues, efforts need to be made in the direction of generating appropriate data for analysing women's development in a more useful manner. (Dr Preet Rustagi is Junior Fellow at the Centre for Women's Development Studies, New Delhi. Her research interests include gender and development issues, gender

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End Notes 1.

2. 3.

One useful outcome of the UNDPs efforts at the global and regional levels to bring out the Human Development Reports (HDRs) since the 1990s, especially the Human Development in South Asia (HDSA) ever since 1997, is the availability of data from different sources in one document. Most of the data used here are from these documents. The countries included here are the 7 SAARC members: India, Pakistan, Bangladesh, Nepal, Sri Lanka, Bhutan and Maldives. Only among few of the communities in the region where matriliny is practiced, women have control over land and economic property through inheritance; for instance, in Bhutan 80 per cent of the population follows matriliny. Similarly parts of Kerala and northeast region in India also follow matrilineal property transfers. The Human Development Reports published by UNDP notes this region as one of the worst in the world as per the gender related development levels (HDR, various years; HDSA, 2000).

Bibliography l B. Agarwal, A Field of One's Own, (Cambridge: Cambridge University Press 1996). l S.B. Agnihotri, Sex Ratio Patterns in the Indian Population - A Fresh Exploration, (New

Delhi: Sage, 2000). Alailima, 'The Situation of Women: Employment, Unemployment and Underemployment,' in Women in the Economy, Centre for Women's Research, Colombo, Working Paper no. 12 1998. l Fred Arnold, 'Son Preference in South Asia', in Sathar and Phillips (eds.), Fertility Transition in South Asia, 2001, pp. 281-299. l Harsha Aturupane, Unemployment among Educated Women in Sri Lanka, (Colombo: Department of National Planning, 1996). l Radheshyam Bairagi, 'Effects of Sex Preference on contraceptive Use: Abortion and Fertility in Matlab, Bangladesh,' International Family Planning Perspectives, 2001, vol. 27(3), pp. 137-143. l Kalpana Bardhan, 'Women: Work, Welfare, and Status: Forces of Tradition and Change in India', South Asia Bulletin, 1986, vol. 6(1), pp. 3-16. l Rama V. Baru, 'Privatisation of Health Services - A South Asian Perspective', Economic and Political Weekly, 2003, vol. 38(42), pp. 4433-37. l A.M. Basu, Culture, the Status of Women and demographic Behaviour, (Oxford: Clarendon Press, 1992). l Nirmala Buch, 'Women's Experience in New Panchayats: The Emerging Leadership of Rural Women', Occasional Paper No. 35, (New Delhi: Centre for Women's Development Studies, 2000). l John Caldwell, Theory of Fertility Decline, (London: Academic Press, 1982). l M. Carr, Martha Chen and Renana Jhabvala (eds.), Speaking Out: Women's Economic Empowerment in South Asia, (New Delhi: Vistaar Publications, 1996). l Alice Clark, 'Social Demography of Excess Female Mortality in India: New Directions', Economic and Political Weekly, 1987. vol. 22(17): WS 12-21. l Anindita Datta, 'Articulation of an Integrated Women's Health Policy Using the Life Cycle Approach', Indian Journal of Gender Studies, 2003, vol. 10(1), pp. 25-43. l Sabu George, Rajarathram Abel and B.D. Miller, 'Female Infanticide in Rural South India', Economic and Political Weekly, 1992, vol. 27(22): pp. 1153-1156. l Sarla Gopalan and Mira Shiva, National Profile on Women, Health and Development, Voluntary Health Association of India compiled for WHO, August 2000. l B. Hartmann and H. Standing, The Poverty of Population Control: Family Planning and Health Policy in Bangladesh, (London: Bangladesh International Action Group, 1989). l Patricia

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l HDSA, Human Development in South Asia, Mahbub-ul-Haq Human Development Centre,

(Karachi: Oxford University Press, 1997-2002). l J. Hoddinott, 'Household Economics and the Economics of the Household'. Paper

presented at the IFPRI/ World Bank Conference on Intra-Household Allocation, IFPRI, Washington, 12-14 February, 1992. l ISS, Women and Political Empowerment Series, New Delhi: Institute of Social Science, 1995-2001. l Swarna Jayaweera (ed.), Women in Post-Independence Sri Lanka, (New Delhi: Sage, 2002). l Swarna Jayaweera and Thana Sanmugam, Graduate Employment in Sri Lanka in the 1990s, (Colombo: Centre for Women's Research, 2002). l Naila Kabeer, Reversed Realities - Gender Hierarchies in Development Thought, (New Delhi: Kali for Women, 1994). l Y.B. Karki, 'Sex Ratio in Nepal,' Economic Journal of Nepal, 1992, vol. 15(1), pp. 30-37. l Shahrukh R. Khan, 'South Asia' in Elizabeth M. King and M. Anne Hill (eds.), Women's Education in Developing Countries: Barriers, Benefits and Policies, (Baltimore: John Hopkins University Press for the World Bank, 1993), pp. 211-246. l Tiziana Leone, Zoe Mathews and Gianpiero Dalla Zuanna, 'Impact and Determinants of Sex Preference in Nepal,' International Family Planning Perspectives, 2003, vol. 29(2), pp. 69-75. l Madhuri Mathema, 'Women in South Asia: Pakistan, Bangladesh, and Nepal' in Stromquist (ed.), 1998. l Mazumdar, et al. 'Gender and Governance - India country paper', Centre for Women's Development Studies, 2001. l Barbara D. Miller, The Endangered Sex: Neglect of Female Children in Rural North (India, Ithaca and London: Cornell University Press, 1981). l Imrana Qadeer, 'Reproductive Health - A Public Health Perspective', Economic and Political Weekly, 1998, vol. 33(41), pp. 2675-84. l Zeba Ayesha Sathar and James F. Phillips (eds.), Fertility Transition in South Asia, (New York: Oxford University Press, 2001). l Nelly P. Stromquist (ed.), Women in the Third World - An Encyclopedia of Contemporary Issues, (New York and London: Garland Publishing, 1998). l UN Secretariat, 'Sex Differentials in Survivorship in the Developing World: Levels, Regional Patterns and Demographic Determinants', Population Bulletin of the UN, 1998, vol. 25: pp.51-64. l UNDP, Human Development Report, United Nations Development Programme, (New Delhi: Oxford University Press, 1990-2003). l UNFPA, The State of the World Population, New York: UNFPA, 1999. l Jeemol Unni, 'Gender and Informality in Labour Market in South Asia', Economic and Political Weekly, 2001, vol. 36(26), pp. 2360-77. l Jeevika Weerahewa and Anoma Ariyawardana, 'Impact of the WTO on Women Workers in Sri Lanka, in Veena Jha (ed.), Trade, Globalisation and Gender - Evidence from South Asia, UNIFEM in Collaboration with UNCTAD, (New Delhi: UNIFEM, 2003).

India-Pakistan Trade S. Akbar Zaidi

Introduction India and Pakistan are both low income countries and are amongst the poorest and least developed nations of the world. They are also two of the seven countries which have openly undertaken nuclear testing and consider themselves to be nuclear powers. Add to this the fact that the two neighbours have fought at least two full-fledged wars- with Pakistan losing its more populous wing as a consequence- and numerous other battles and skirmishes from as early as a year after independence and as recently as less than five years ago in 1999. They have a history wrought with difficulties and distrust and a future which threatens far worse. The worst fear, not just of residents of the two countries but of the region and the world, is that irresponsible governments in both, or either country, could resort to the extreme measure of using nuclear weapons against one another.

This

article proposes a different path to normalisation of ties between India and Pakistan keeping in mind that different and conflicting stands and claims on Kashmir are the biggest, or perhaps the only, stumbling block to normalisation of ties between the two countries. Since it is unlikely that the Kashmir issue is going to be resolved to anyone's liking in the near future, the argument is that, rather than Kashmir hold the 1.4 billion people of India and Pakistan hostage, it is perhaps important to make headway in other directions, which may eventually also have a positive impact on the impasse over Kashmir. Partial normalisation in other areas can still take place despite the continuing disagreements and conflicts over Kashmir.

he route towards better relations between India and Pakistan is open trade between the two countries. The paper argues that there is no economic rationale and justification for either of the two countries not to trade with each other, especially in an era of globalisation and liberalisation and after the setting up of the World Trade Organisation, of which both countries are members. Not only are there large traderelated advantages to governments and consumers in both countries, but positive exogenous factors are also likely to emerge as a result. The most important argument in this paper is that, given Pakistan's relatively weaker economy, especially compared to India's, it is in Pakistan's interest far more than it is India's, to have normal trade relations with each other.

Trade Logic with India1 Pakistan and India have been trading with each other since 1947 and, in the last 57 years, trade has come to a complete halt for only nine years- between 1965-74. However, despite a largely uninterrupted trade regime since 1974, the extent of trade between India and Pakistan is limited and almost negligible as Table 1 shows. Rajesh Chadha and Devender Pratap- using figures only for legal trade- show that:

While about 4.5 per cent of India's total exports are directed to South Asia, the figure is 3 per cent in the case of Pakistan2. Exports to Pakistan constitute about 8 per cent of India's total exports to South Asia. Pakistan's exports to India have a higher average share of about 40 per cent, during 1998-2000, of Pakistan's total exports to South Asia compared with an average share of about 17 per cent during 1995-1997. In the case of imports, 0.8 per cent of India's imports originate from South Asia and the figure is 0.5 per cent for Pakistan. Within India's imports from South Asia, 36 per cent originate from Pakistan. Pakistan sources 69 per cent of its total South Asian imports from India. Clearly, India and Pakistan are two major trading partners among the South Asian countries despite all hurdles3. However, there is no India-Pakistan trade agreement and Pakistan allows only a handful of commodities to be imported from India, which have, nevertheless, increased over the years. In 1996, 615 items were permissible for trade, although 90 per cent of the trade took place in only 42 items4; in April 2003, following the peace initiative by the Indian Prime Minister, the Pakistani Prime Minister increased the number of tradable items5. While the South Asian Free Trade Area (SAFTA) agreement will, by 2006, open doors to further trade between the two countries, India-Pakistan trade should take place before the agreement comes into effect, and should go well beyond the guidelines set by the agreement.

here are some curious facts about trade between India and Pakistan which need to be highlighted (see Tables 1 and 2). Firstly, open, formal (legal) trade between the two countries is very small, and in the last decade has varied between a low of US$ 106 million in 1994-95 which was a mere 0.6 percent of Pakistan's total trade that year, to a high of US$ 321 million in 1998-99 or 1.9 percent of Pakistan's total trade. Clearly the volume and scale of trade between the two countries is very small in absolute terms and as a percentage of the total trade of both countries. However, given the political history of the two countries- with many wars and consistently poor diplomatic relations affecting trade and economic cooperation- it is believed that third-country trade and smuggling increase the volume of trade from anywhere between US$ 1-1.5 billion, still a small number, but of somewhat more significance, particularly for Pakistan's smaller economy. Table 1: India Pakistan Trade 1990-2000 (max and min range, in %) Share of India's total Exports, 1990-2000: Share of India's total Imports, 1990-2000:

Share of Pakistan's total Exports, 1990-2000: Share of Pakistan 's total Imports, 1990-2000:

to South Asia: 2.7-5.1 - 0.2 - 0.4 to Pakistan: from South Asia: 0.4-0.8 from Pakistan: 0.2-0.6 to South Asia: 2.6 - 4.9 to India: 0.4 - 2.4 from South Asia: 0.4 -1.7 from India: 0.2 - 0.6

Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More Butter and Less Guns', unpublished mimeograph, New Delhi, 2003.

Table 2: Pakistan's Total Trade + Trade with India 1992-2002 (in US$ million) 1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

Export

6819

6812

8141

8707

8323

8627

7779

8568

9201

9134

Import

9963

8561

10401

11804

11894

10118

9431

10309

10728

10339

Export

175

Import

197

153

146

127

235

187

Total

India

Source: State Bank of Pakistan, Annual Report, various years, Karachi.

lthough much is made of the rather limited volume of trade between India and Pakistan, a number of points, especially from the Pakistani angle, have been overlooked. Firstly, the quantum of official trade between the two countries of between US$ 200-300 million needs to be supplemented with illicit trade between the two countries and the trade of goods which originate in either country but are imported through a third country. This recalculation increases the total trade between the countries by a factor of four or five. This is a significant increase, especially when one considers the fact that already, for Pakistan at least and using the official bilateral trade figures alone, India is the main trading partner in the SAARC region. A new set of figures would further enhance that dominance. Compared to Pakistan's neighboursAfghanistan, Iran, and China- trade with India is far greater than the former two, and with the new set of figures, India comes a close second to China. Clearly, despite an unfavourable trade, economic and political environment, there is already substantial trade between Pakistan and India which has even greater economic possibilities.

erhaps the most curious fact about Pakistan's trade with India is this assumption that it is so low. Certainly official figures, as we show in Table 2 above, do enforce that perception, but even if we limit ourselves to these official figures, some rather interesting observations emerge. For example, in recent years, when imports from India have ranged from US$ 145 million in 1998-99 to US$ 235 million in 2000-01 and to US$ 187 million in 2001-02, India emerges as Pakistan's 16th biggest trading partner in terms of imports. This figure is more interesting since the four largest importers into Pakistan are oil-exporting countries (Saudi Arabia, UAE and Kuwait) and Malaysia which exports mainly palm oil to Pakistan. Despite hostilities, wars and diplomatic breakdown, Pakistan imports (based only on official figures, which are perhaps a third of actual volume) more from India than it does from France, Canada, Switzerland, the Netherlands, Turkey, Iran or even Thailand!- most interesting given the political relations between the two countries. In terms of total trade, exports and imports based on the under-reported 'official' trade between the two countries, India ranks 21st as Pakistan's trading partner. Clearly the possibilities of gains from opening trade are tremendous, especially if we look at the nature of trade between the two countries.

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n the decade 1990-2000, Pakistan has had a trade surplus with India in only three of these ten years, importing far more than it exports. Most of Pakistan's exports to India

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transaction costs are also lowered and such trade 'facilitates the flow of ideas and knowledge that strengthen international competitiveness'.12 The study looks at a number of sectors in the Pakistan economy and concludes that 'the economic benefits of liberalising trade with India outweigh costs'.13 Consumers in Pakistan will benefit 'unambiguously' because of lower prices, and the government will get far greater revenue from legalising the existing illicit border trade. Moreover, 'important segments of producers would also benefit because of increased competitiveness and market access to a much larger Indian economy'.14

Total Imports

Agriculture and Food (Sugar) Iron and manganese ore

2001-02

2000-01

Rs 11,471,155

Rs 13,928,480

(10)

(39)

(17)

(1)

Medicinal inputs

Plastics

Tyres and Rubber

Chemicals (Pure Xylenes)

Total Exports

Agriculture and Food (Dates)

2001-02

2000-01

Rs 3,246,436

Rs 2,777,405

(42)

(35)

(Rice) 5

Crude Petroleum

Cotton staple

(12)

(-)

Cotton yarn and related (Cotton tents)

(23)

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study by the Karachi Chamber of Commerce and Industry endorses the idea of trade with India on the grounds that now, having signed the agreements which have led to the setting up of the World Trade Organisation, all signatory members have to be treated equally, and understands that giving the Most Favoured Nation (MFN) status to India 'is not a special favour to India, but an obligation under WTO and an economic and geopolitical imperative'.15 In this new world order, Pakistan has to face competition from all countries, including India, and hence 'instead of shying away, we should be well prepared to face the eventuality. In any case, salvation lies in streamlining of operations and upgrading of technology which was long overdue'.16 This study presents a sector-wise analysis of trade with India and shows the impact on each sector, looking at numerous aspects including what it calls 'silver linings'. For example, it feels that while the opening up of trade with India is likely to affect the engineering sector, cheaper steel and iron ore imports from India, will have a positive impact overall and 'will result in the reduction of very high inventory costs of the engineering sector'.17 However, the main argument which this report seems to be making is that Pakistan trades with almost every country in the world, so why not with India? There is also the important issue of the impact of globalisation. All countries of the world are affected by it, some favourably and others not so favourably. To take further advantages or to protect themselves from the negative impacts of globalisation, many neighbouring countries have established trading blocs and currently around 60 per cent of world trade takes place through regional trading arrangements. There are huge advantages and benefits to such regional trading arrangements, yet, 'South Asia is the only major world region not to move towards regional cooperation and integration'.18 Clearly, normalisation of trading ties between India and Pakistan should be seen as a first step to such trading arrangements. As Burki argues, 'our policy-makers must be cognisant of the fact that the world is organising itself into a number of regional arrangements and we in Pakistan cannot afford to be left out of them'.19

ll discussion on trade between India and Pakistan is limited by a host of factors which makes conclusive analysis difficult. Firstly, no one really knows how much of unofficial (smuggled) and third-country trade actually takes place, so even figures of US$ 1-1.5 billion are open to debate; we really don't know. Secondly, and perhaps more importantly, much of the analysis on improving trade relations between the two countries is based on a static analysis which is based on the very limited existing trade patterns. No one really knows the true potential of trade between India and Pakistan

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because so far most of the trade takes place in a very small handful of commodities. Free 'normal' trade between India and Pakistan allows thousands of goods, which have so far not been traded, to come into the market of both countries. For example, the talk about two pipe and gas lines from Turkmenistan and Iran to India resulting in gains to both Pakistan and India, may materialise once talks resume and political conditions improve. Although it is difficult to say how much Pakistan will gain from royalties and by laying the pipelines- royalty figures, though unreliable, are being quoted at US$ 500 million each year for each of the pipelines- if true, they could eventually be equivalent to as much as 5 percent of Pakistan's export earnings, no mean figure to scoff at. Moreover, with lower transportation costs, there is likely to be some import 'switching' as well, where goods previously imported from other countries may now be imported from India. Trade between India and Pakistan will bring down the cost of business (particularly for Pakistan), enhance the purchasing power of consumers and increase government revenue. The volume and variety of tradable goods, given a period of time, can be extraordinary. Trade with India might not radically alter Pakistan's economy for the better (and the fears that Pakistan's India will be swamped by cheap Indian goods are also unwarranted), but there are likely to be numerous positive externalities which can accrue from opening up trade by Pakistan with India.

umerous small industries are likely to benefit from cheaper raw materials from India and may help address the problem of some of our sick industries. This is likely to have an employment-enhancing effect. Moreover, many of Pakistan's industries will benefit from increased competitiveness and will have to become more efficient in light of international and Indian imports. Also, greater market access of Pakistani exports should be beneficial. As we have argued above, consumers in Pakistan are going to benefit by cheaper Indian imports as well. As the Ministry of Commerce study argues, 'exposure to competition from a neighbour would encourage policy makers as well as the private sector in Pakistan to focus more sharply on the investments needed to strengthen Pakistan's international competitiveness'20. Moreover, the report continues, 'the fear of a deluge of Indian products in the Pakistan market after liberalising trade is much exaggerated. This has not happened in the past when trade has been liberalised and is unlikely to happen in the future, given Pakistan's global orientation in trade and the quality conscious Pakistani consumers'21. Also, the arguments by E. Sridharan and by the Government of Pakistan that 'it is unrealistic to visualise either country, particularly India, having a large impact on the total trade of the other'22, do not examine the possibilities for presently non-tradables coming into the trade orbit.

hile trade can be a component of broader Confidence Building Measures (CBMs) and an improvement in the overall atmosphere between these two neighbours, micro level linkages and opportunities, particularly in Pakistan's Punjab and the NWFP, may pay higher dividends. In terms of the broader political economy factors, trade normalisation is likely to improve the overall atmosphere in which India and Pakistan address all contentious issues. Even if there are no substantive improvements in Confidence Building Measures between the two countries on account of trade, improved

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trade is unlikely to make matters much worse. Trade with India, in this regard, is a winwin situation. (S. Akbar Zaidi is the Executive Editor, South Asian Journal and an independent Karachi-based social scientist).

End Notes 1.

2. 3. 4. 5.

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Much of this paper draws from the following sources: E. Sridharan, 'Economic Cooperation and Security Spill-Overs: The Case of India and Pakistan', in Michael Krepon and Chris Gagne (eds.), Economic Confidence-Building and Regional Security, The Henry L Stimson Centre, Report No 36, Washington, October 2000; S. Akbar Zaidi, 'Economic Confidence Building measures in South Asia: Trade as a Precursor to Peace with India', in Moonis Ahmar, (ed.), The Challenge of Confidence Building in South Asia, (New Delhi: Haranand Publications, 2001); Rajesh Chadha and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More Butter and Less Guns', unpublished mimeograph, New Delhi, 2003, and S. Akbar Zaidi, 'Pakistan's Development Options: Does India Matter At All?', Paper presented at the Deterrence Theory and South Asia workshop, as part of the University of Pennsylvania Institute for the Advanced Study of India project International Relations Theory and South Asia: Towards Long-range Research on Conflict Resolution and Cooperation-building, New Delhi, August 26-27, 2003, to be published in a collection of essays shortly. Average for three years, viz. 1998-2000. Chadha and Pratap, op. cit., 2003. Government of Pakistan, Ministry of Commerce, Pakistan-India Trade: Transition to the GATT Regime, Islamabad, September 1996. Some countries have a negative list for traded goods, i.e., they import all commodities except those which are on this negative list, as does Pakistan when it imports from most countries. In the case of India, however, Pakistan only allows import of items on this 'positive' list. E. Sridharan, op. cit., p. 97. Government of Pakistan, op. cit., p. 3. Sridharan, op. cit., p. 68. Ibid., p. 70. Ibid., p. 89. Ibid., p. 89. Government of Pakistan, Ministry of Commerce, Pakistan-India Trade: Transition to the GATT Regime, Islamabad, September 1996, p. 1. Ibid., p. 2, emphasis added. Ibid., p. 2. Karachi Chamber of Commerce and Industry (KCCI), Freer Trade With India: Its Raison d'etre and Impact, Research and Development Cell, KCCI, Karachi, March 1996, p. 1. Ibid., p. 3. Ibid., p. 5. Shahid Javed Burki, 'The Themes to be Explored', Dawn, Karachi, January 23, 2001. Ibid. Government of Pakistan, op. cit., p. 16. Ibid., p. 16. E. Sridharan, op. cit., p. 76.

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India: State of the Economy Dr Rajesh Mehta

I. Introduction India had followed the system of a control-and-command economy since 1951, based on the development policies as outlined in its Five-Year Plans1. This continued for almost three decades. The principle objectives, among others, were: (a) to increase aggregate consumption, (b) to reduce unemployment, (c) to work towards selfreliance and self-sufficiency and (d) reduction in disparities. The priority of these objectives changed from plan to plan. To quote an example, India's Fifth Five-year Plan of 1974-79 outlines: 'Removal of poverty and attainment of self-reliance are the two major objectives that the country has set out to accomplish in the Fifth Plan. As necessary corollaries, they require higher growth, better distribution of incomes and a very significant step-up in the domestic rate of saving' (c.f. Government of India, 1974). The Indian economy since 1991 has been undergoing constant and drastic economic reforms. These reforms have resulted in a shift from the inward-oriented policy of the past to an outward-looking one. Although this process of reform had started in the mid-1980s, it suffered interruptions a few times owing to an over-cautious approach and several other factors. It was only in the early 1990s that the process was accelerated. The reforms had to take care of various short-term macro-economic (particularly fiscal and external) imbalances as well as integrate the domestic economy increasingly with the world through deregulation and competition. Although the reforms were driven by a macro economic crisis, they have been sustained for over a decade. The major emphasis of these reforms was to attain higher growth and efficiency. In a democratic country with a federal system, this was sought to be attained through a wide consultation process to achieve social and political consensus. The approach to India's reform program was gradual and steady rather than of a 'shock therapy' as was carried out in Latin America or in the East European economies.

he main objective of this paper is to review select features of the present state of the Indian economy. Section II of this paper summarises the changes in India's development perspective/strategies. It also gives a brief summary of India's economic reforms during the 1990s. With the institutions of structural reform, the different policies began to be operated under the open macro economic framework. Section III compares some select macro economic indicators like output growth, composition of output, saving and investment rates during the pre and post reform period. Section IV gives a brief summary of changes in some welfare indicators like 'people below poverty line' and 'rate of unemployment'. Section V reviews the changes in India's

trade policy reforms and their implication on India's imports and exports. Some select concluding remarks are given in Section VI.

II. Development Policy Perspective The trend towards a liberal economic policy had found its full expression in the early 1990s with the Government of India announcing a series of packages of stabilisation and structural policy reforms. This was certainly a major departure from the relatively protectionist economic policies pursued till the early 1980s. Such a break was a result of a change in the perception of the economic policy mind-set in the country. While the objectives of self-reliance and self-sufficiency had influenced economic policy formulation in the 1950s and 1960s, factors like export-led growth, improving the efficiency and competitiveness of Indian industries prevailed upon economic policy-making during the late 1970s and the early 1980s. The current economic policy reforms, on the other hand, seem to have been guided mainly by concerns regarding the globalisation of the Indian economy, improving internal and external competitiveness, private sector participation and removal of inadequacies or constraints. Macro stabilisation policies were achieved through corrections in fiscal, financial, monetary and exchange rate imbalances, which were not being sustained. These policy changes were accomplished by structural reforms in the form of industrial deregulation, trade and tariff policies, increasing opportunities for foreign direct investment, public enterprise reforms and social sector policies. The main objective of these reforms was to re-orient the Indian economy so as to make it open to marketdriven forces. The reforms were carried out in many segments of economic activity, though their coverage and depth varied from sector to sector. A summary of these reforms is given in Box 1. There exists significant literature2 to analyse the varied impact of these reforms on the Indian economy.

gainst a backdrop of these factors, the objectives of the plans and the strategy of development have completely changed in recent years. At present, the plans focus on growth targets per capita income of GDP, and the development strategy is to be indirectly planning to promote the private sector. The Tenth Five-Year Plan of the Government of India (2002) outlines the main objective as, '…. that the tenth plan should aim at an indicative target of 8 percent average GDP growth for the period 2002-07…' However, it adds: '… that economic growth cannot be the only objective of national planning and, indeed, over the years development objectives are being defined not just in terms of increase in GDP or per capita income but more broadly in terms of enhancement of human well being…' Regarding development strategy, the role of the government has drastically changed, as can be found in Tenth Five-Year Plan document. For instance, '… the public sector is much less dominant than it used to be in many critical sectors and its relative position is likely to decline further as government ownership in many existing public sector organisations is expected to substantially decline. It is clear that industrial growth in future will depend largely

upon the performance of the private sector and our policies must therefore provide an environment, which is conducive to such growth. …' (cf Government of India, (2002b), Vol. I, pp 7.)

III. Macroeconomic Dimensions Output Box 1: Paradigms of Economic Reforms in India Since 1991 Pre-Reforms Period

Post-Reforms Period

1. Quantitative licensing on trade and industry.

1. Abolition of industrial and trade licensing.

2. State regulated monopolies of utilities & trade.

2. Removal of state monopolies, privatisation & divestment.

3. Govt. control on finance & capital markets.

3. Liberalisation of financial & capital markets.

4. Restrictions on foreign investment and technology.

4. Liberal regime for FDI, portfolio investment, foreign technology.

5. Export promotion and export diversification.

5. Import substitution and export of primary goods, No import bias.

6. High duties & taxes with multiple rates.

6. Reduction and rationalisation of taxes and duties dispersion.

7. Sector-specific monetary, fiscal and tariff policies.

7. Sector-neutral monetary, fiscal and tariff policies.

8. End-use and sector-specific multiple interest rates.

8. Flexible interest rates without any end use - or controlled interest rates sector specifications.

9. Foreign exchange control, no convertibility of rupee.

9. Abolition of exchange control, full convertibility on current account.

10. Multiple and fixed exchange rates.

10. United and market determined exchange rates.

11. Administered prices for minerals, public utilities.

11. Abolition of all administered prices essential on goods except for few strategic sectors.

12. Tax concessions on exports and saving.. s

12. Rationalisation of structure, and concessions being phased out.

13. Explicit subsidies on food, fertilizers, and some strategic sectors.

13. No significant change, budget subsidies on LPG essential items and kerosene introduced.

14. Hidden subsidies on power, urban transport.

14. No significant change.

15. General lack of consumer protection and other rights.

15. Acts governing consumer rights, Intellectual Property Rights, independent other rights regulatory authorities and other.

16. Central planning, discretionary process - high.

16. Decentralisation, sound institutional framework, degree of civil service reforms..

17. Outdated Companies Act.

17. No change.

18. No exit policy for land and labour.

18. No change in labour policy, slow progress of reforms in land markets.

19. Outdated legal system.

19. No change.

Source: Das (2003)

fter independence, the output of the Indian economy (i.e. Gross Domestic Product or GDP) stagnated around an average growth of 3.5 per cent per annum

Table 1: Growth Performance in India and Select Emerging Market Economies (Annual average growth rate in percent)

Country

GDP Agriculture Industry Services 1980- 1990- 2001 2002 2003 1980- 1990- 1980- 1990- 1980- 1990 1990 2000 1990 2000 1990 2000 1990 - 2000

0.0 4.5 Argentina -0.7 4.3 -4.4 -10.9 5.5 0.7 3.4 -1.3 3.8 3.3 3.0 Brazil 2.7 2.9 1.4 1.5 1.5 2.8 3.2 2.0 2.6 13.5 9.0 Chinahe changes 10.1 10.3 7.5 8.0 7.5 5.9 4.1 11.1 13.7 in sources of growth as well as the process have resulted in significant 7.0 8.0 Indiashifts in 5.8 6.0 5.6 4.3 7.0 3.1 3.0 6.9 6.4 production structure (Table 2). The services sector (including 6.5 4.0 Indonesia 6.1 4.2 3.4 3.7 3.5 3.6 2.1 7.3 5.2 construction) with a high growth rate has emerged as the largest sector with more 4.9 7.2 Malaysia 5.3 7.0 0.3 4.1 4.2 3.4 0.3 6.8 8.6 than a 50 per cent share in total real output. On the other hand, the share of 1.4 2.9 Mexico 1.1 3.1 -0.2 0.7 1.5 0.8 1.8 1.1 3.8 agriculture in output has been consistently declining as compared to the7.3 earlier 3.7 Thailand 7.6 4.2 1.9 5.3 5.0 3.9 2.1 9.8 5.3 periods. Computed on the basis of data from World Bank (2002), World Development Indicators 2002 Source: Reserve Bank of India (2003).

Table 2: India: Sectoral Composition of Real Gross Domestic Product (Per cent) 1950s 1960s 1970s 1980s 1990s 2000- 2001- 200201 P 02 * 03 # Savings and investment 1. Agriculture and Allied 56.1 47.8 42.8 36.4 29.1 23.8 23.9 In22.1 The increasing rate of real output of a country demands resource mobilisation. this Activities context it should be noted that the rate of gross domestic savings (as a proportion of 2. Industry 11.7 15.1 16.9 19.5 21.9 22.0 21.5 21.8 gross domestic product) has increased from 21 per cent in the pre-reform period to 3. Services 32.6 37.3 40.3 44.0 49.0 54.1 54.6 56.1 around 24.0 per cent in the later half of the post-reform era (Table 3). It is also 4. GDP at factor cost 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 observed that India's savings rate has fluctuated significantly from year to year during P Provisional, * Quick Estimates, # Revised Estimates Sector

4 both the pre Bank and ofpost Source: Reserve Indiareform (2004). era . The sources of gross domestic savings have changed significantly in the recent past. The household sector (particularly financial savings) has significantly increased its share in the post-reform period. The gross domestic savings in a large number of East Asian emerging markets have increased significantly in the last 2-3 decades (Table 3). Although India's savings also increased, the rate of increase is significantly lower than that of East Asian countries. The declining trend in India's savings rate can be attributed, to a large extent, to public savings which have shown a negative value since 19985.

otably, the structural adjustment process has led to an increase in demand on investment. India's investment rate has comparatively increased in the postreform period as compared to the pre-reform period. However, it is relatively low compared to other countries. India has to enhance her savings rate if the 8 per cent target of the Tenth Five-Year Plan is to be achieved.

Figure I: Poverty Rate in India, 1974-2000 Poverty Rate (%)

54.9

51.3 44.5

38.9

26.1

19.3

(Per cent of GDP) Country

Gross Domestic Saving

Gross Domestic Investment

1971-80 1981-90 1991-96 1997-2003 1971-80 1981-90 1991-96 1997-2003 China

35.8

20.8

40.3

39.2

33.9

30.5

39.6

Hong Kong

28.4

33.5

32.8

32.2

27.8

27.2

30.4

27.5

India

20.5

21.2

22.2

23.5

20.5

22.4

23.6

24.0

24.1

19.3

29.3

31.3

17.5

20.8

27.8

22.0

22.2

18.3

IV. Indonesia Social Sector Indicators 21.6 30.9 30.2

38.0

In this section we compare two indicators of social welfare in the pre and post reform Korea, Rep. of 22.3 32.4 35.2 31.5 28.6 30.6 37.0 27.1 periods, namely (1) 29.1 incidence of poverty and44.7 (2) level24.9 of unemployment. Malaysia 33.2 37.6 30.6 38.8 27.5 Philippines

26.5

22.2

16.5

Figure 1 gives the percentage of the Indian population living in poverty during 1973Singapore 30.0 41.8 48.1 47.7 41.2 41.7 35.1 29.3 74 to 1999-2000 and a projection for 2006-07 as given in the Indian Tenth Five-Year Thailand 22.2 27.2 34.6 31.8 25.3 30.7 41.0 24.1 6 PlanSource: document . It shows that the percentage of population living in poverty fell Reserve Bank of India (2004) sharply from 56 per cent in 1973-74 to 26 per cent in 1999-20007. The number of poor people declined steadily from 321 million in 1973-74, to 240 million in 1999-2000. In India, the poverty lines are described as permitting a calorie intake of, say, 2400 calories in rural areas and 2100 calories in the urban areas.

ne can see from this figure that the rate of decline of India's poverty was higher when the growth rate was high. Apart from an increase in the GDP growth, a number of other factors have probably affected the decline in poverty rate. There is a controversy over the declining rate of population below the poverty line being inconsistent overtime. In fact, quite a few studies show that the number of people below the poverty line (in percentage) increased immediately after the reforms (i.e. 1992-94) and then led to a significant decline in recent years8.

200607(Projected)

1993-94

1987-88

Year

1999-2000

Table 3: Savings and Investment of Select East Asian Countries and India

1983

1977-78

1973-74

increased significantly since 1993-94 and was above 7.3 per cent in 1999-2000 compared to 6.0 per cent in 1993-94 on Current Daily Status basisâ&#x20AC;Ś . The present rising unemployment is primarily an outcome of a declining job creating capacity of growth, observed since 1993-94. The employment growth fell to 1.07 per cent per annum (between 1993-94 and 1999-2000) from 2.7 per cent per annum in the past (between 1983 and 1993-94) in spite of acceleration in GDP growth from 5.2 per cent between 1983 and 1993-94 to 6.7 per cent between 1993-94 and 1999-2000. It means that the capacity of job creation per unit of output went down about three times compared to that in the 1980s and early 1990s.' Table 4 gives the rate of employment and unemployment in the pre and post-reforms period for select years. The possible factors for this declining rate of employment growth in recent years, have been identified as follow: (i) Employment in the public sector was negative. (ii) The organised sector employment generating capacity was negligible. (iii) The pattern of growth is not favourable to labour intensive sectors. (iv) Shedding of excess labour to make different sectors competitive. (v) Definition of 'small-scale sectors' changes over time.

Table 4: India: Past and Present Macro Scenario on Employment and Unemployment (CDS Basis) (Person years)

It is very difficult to measure the impact of the reforms on the rate of employment (or unemployment) in a country like India where available information is sketchy. It is probably due to the fact that more than 90 per cent of India's employment is in the unorganised or informal sector. Even if some data is available, it is not comparable over time due to definition, coverage and other factors. Recently a report of a special group of Government of India (2002c) has attempted to generate some numbers on a comparable basis9. The report summarises: 'â&#x20AC;Śthe unemployment rate in India has

1983

(Million) 1993-94 1999-2000

Growth per annum (%) 1983 to 1993-94 1993-94 to 1999-2000

All India V. External Sector The Indian trade policy flows894.01 from the 1003.97 general development2.00 strategy that is being Population 718.20 1.95 Labour Force As a result,261.33 335.97 1.31 followed. while trade policies363.33 had been strongly 2.43 biased towards import Workforce 239.57 315.84 336.75 2.70 1.07 substitution, the quantity of trade had been very small. Import control mechanisms Unemployment rate (%) (8.3) (5.99) (7.32) were first introduced as a result of the foreign exchange crisis of the Second Plan No. of unemployed 21.76 20.13 26.58 -0.08 4.74

(1956-61). In the last half of the 1950s, protection from imports was afforded to

All estimates are on CDS (Current Daily Status basis) Parentheses period denote percentage almost all manufacturing activities. In the pre-reform India's import and Source: Government of India (2002c)

export policy was guided by the Import and Export Control Act of 1947. In 1977, two additional orders, namely, the Import Control Order and Export Control Order, were introduced. The subsequent annual policy of imports and exports were based on this legislation alone. A long-term trade policy, for three years, was announced in 1985 by the government and some concrete steps towards liberalisation were taken within the framework of economic reforms. Presently, the two main documents namely, (a) Export and Import Policy, and (b) Handbook of Procedures, summarise the policy, process and procedures of export and imports for five years: April 2002 to March 2007. The import and export policy determines in great detail the import procedures that are applicable to specific products, license, importers entitlement as well as other details relevant for the imports of goods and commodities.

n the pre-reform period, India's trade policy regime was complex and cumbersome. But in the post-reform period all types of quantitative restrictions have been removed10. A number of other indirect measures, mostly relating to money and finances, had been adopted in the earlier years of reforms. Most of these measures were generally introduced by the Indian Central Bank and related to administrative procedures. These were to do with the availability of foreign exchange, advance imports deposit, tax on foreign trade transactions and had the same effect as tariffs. In the 1990s, convertibility on current account too has given flexibility in acquiring foreign exchange on travel, imports and exports. A significant number of other restrictions too have been comparatively eased or removed. Import substitution required import intensive investment alongside increasing government expenditure and the policy of fixed nominal exchange rates. This had two consequences. Firstly, the government budgetary deficit worsened due to increased government expenditure leading to inflation. Domestic inflation in the face of fixed nominal exchange rates caused real exchange rates to appreciate and real returns to exporters to fall. One important consequence of the overvaluation of exchange rates was a worsening of the current account balance during the late 1980s and early 1990s. This led to a gradual depletion of foreign exchange reserves up to a point where the government felt the need to take action.

he high profitability of production for the domestic market relative to production for exports, and the high cost of Indian products compared to their competitors, contributed to the low level of exports. Although India has had many schemes intended to support exports and to compensate for the effects of high production costs and indirect taxes, these schemes had been complex and unsatisfactory in their administrative implementation and procedures. The sum total was a marginalised export activity in India during the pre-reform period. India had a number of very elaborate export incentive schemes that matched the complexity of the import and tariff systems. These arrangements involved compensating exports for domestic and import taxes, and allowing them to import otherwise restricted products for use as inputs. This set of export promotion efforts has been viewed with scepticism, because export volume does not appear to have

improved significantly even after having followed a liberal policy with respect to incentives as well as exchange rate. The Quantitative Restrictions (QR) regime also inflicted very high costs on most Indian exports. In comparison, India's competitors used to obtain basic inputs at world prices and could import any input without delay. Products that required a quick export response and complex backward linkages were heavily penalised by the trade regime. Unfortunately, it is precisely these products that had high value added large export markets and high unit value. Thus, India's exports tended to be simpler and with very low unit value. Furthermore, Indian firms tend to hold much larger inventories due to uncertainties in the availability of imported inputs and local supplies. This raised their costs of production significantly above the competitors that followed just-in-time inventory policies. Keeping this in mind, the new policy packages of the post-reform period aimed to reform the tax and the QR system.

ecent statistics show that India's trade has increased significantly during the post-reform period. To be precise, the share of India's export in world mercantile trade has increased from 0.52 per cent in 1990, to 0.8 percent in 2002 (Table 5). During the reform period India's exports have increased from US$ 18.1 billion in 1990-91 to US$ 52.8 billion in 2002-03, while India's imports have increased from US$ 24.1 billion in 1990-91 to US$ 61.6 billion in 2002-03. The higher growth in India's exports over imports has led to a decline of India's trade deficit (Fig. II). The composition of India's export/import by commodities and destination markets also 11 changed significantly .

Table 5: India's Export and World Trade, 1990-2001

Value of Indias Exports World Trade (Exports) % Share of India in World Trade (Exports)

1990

1995

2000

(US $ Billion) 2001 2002

17.969 3438.6 0.52

30.630 5120.2 0.60

42.101 6310.1 0.67

43.3 6120.8 0.71

49.25 6138.9 0.80

Source: Data of IFS Online, IMF (2003).

Source: Government of India, (2002a, 2002b). Sources: Government of India, http://commerce.nic.in/indtrde.htm; CMIE, India Trades.

VI. Concluding Observations This paper provides a review of the state of India's economy in the context of the reforms that were initiated in early 1990s. It gives an overview of recent trends in India's economy with a particular emphasis on real macro-economic indicators, select

100

Figure II: India's Exports and Imports with World 70000 60000

Value (Mill. US$)

50000 40000 30000 20000 10000 0 199091

199192

199293

199394

199495

199596

199697 Year

199798

199899

199900

200001

Imports

200101

200203

Exports

social factors and the trade scenario. At present, the Indian economy is comparatively in a better position. Although the country initially followed a cautious approach and

101

Government of India, Report of the Special Group on Targeting Ten Million Employment l Opportunities per year over the Tenth Plan Period, (Chairman Dr. S.P. Gupta), Planning Commission, New Delhi, 2002c. l Government of India, Economic Survey 2002-03, Ministry of Finance and Company Affairs, Economic Division, 2003. l IMF, Direction of Trade Statistics, June, 2003. l V. Joshi and I. M. D. Little, India's Economic Reforms-1991-2001, (New Delhi: Oxford University Press, 1996) . l Anne O. Krueger (ed.), Economic Policy Reforms and the Indian Economy, (University of Chicago Press, 2002) p. 377. l Arvind Panagariya, 'India's Economic Reforms: What Has Been Accomplished? What Remains to Be Done?' Asian Development Bank, ERD Policy Brief Series no. 2, 2002. l Reserve Bank of India, Report on Currency and Finance 2001-02, Mumbai, 2003. l Reserve Bank of India, Report on Currency and Finance 2001-02, Mumbai, 2004. l RIS, South Asia Development and Cooperation Report 2004, (New Delhi: RIS, 2004). l T.N. Srinivasan and Suresh D. Tendulkar, Reintegrating India with the World Economy, (New Delhi: Oxford University Press, 2003). l 'India's Shining Hopes: A Survey of India, Special Issue on India's Prospects', The Economist, London, 2004. l World Bank, India: Reducing Poverty, Accelerating Development, (Washington D.C.: Oxford University Press for the World Bank, 2000).

102

Pakistan: Performance and Prospects A. R. Kemal

I. Introduction During the last few years Pakistan has witnessed a sharp improvement in its financial sector. From a situation of unsustainable fiscal and balance of payment deficits a few years ago, the balance of payments has turned into a surplus and there has been a sharp decline in the fiscal deficit. The fiscal deficit has fallen to 4 per cent of GDP, balance of payments has a surplus equivalent to 3.9 per cent of GDP, foreign exchange reserves have exceeded US$ 12.5 billion, exports are growing at a rate of more than 15 per cent, workers' remittances are expected to range between US$ 3.5-US$ 4.0 billion, the interest rates have fallen to less than 7 per cent, rupee has stabilised and the inflation rate ranges between 3 to 4 per cent. The real sector of the economy has also shown improved performance during 2002-03: growth rates of GDP, agriculture and the large scale manufacturing sector have been 5.1, 4.1 and 8.7 per cent, respectively. Moreover, the GDP growth is expected to be more than a target of 5.3 per cent for the current year and the growth rate of the manufacturing sector will be in double digits. This indeed shows a remarkable turn around in the economy over the last couple of years. The rising growth rates of per capita income are expected to ease the employment and poverty situation.

he strong financial macroeconomic indicators, however, have so far failed to raise the rate of investment; fixed investment in 2001-02 and 2002-03 has been just 13.1 per cent of GDP. With this level of investment, the growth rates of no more than 4 per cent can be sustained in the long run. Considering that there is no longer the debthangover and due to the continuity of the policies for more than three years and resolve of the government to honour the agreements reached by the previous government, the perception of investors is likely to improve regarding the investment climate in Pakistan. It needs to be underlined that the higher levels of investment are a pre-requisite for sustained growth of per capita incomes, human development, employment generation and better living standards. In this paper, I will examine structural changes brought about in the fiscal, monetary and financial sectors as well as in the real sector of the economy.

II. Fiscal and Monetary Policies Fiscal deficit as a proportion of GDP is a crucial variable both for the stability of the economy as well as for investors' confidence. High fiscal deficits raise the inflation rate and may crowd out private investment. Since high fiscal deficits imply an increase in the tax rates or a reduction in the development expenditure resulting in poor and inadequate infrastructure, investors are reluctant to invest. Accordingly, Pakistan has

103

104

been grappling with the handicap of fiscal deficit. When Pakistan signed the first of many Structural Adjustment and Stabilisation Programs with the IMF, the fiscal deficit in 1987-88 was as high as 8.5 per cent of GDP; by 1998-99 the fiscal deficit was brought down to 6.1 per cent. While the deficit increased to 6.6 percent in 1999-2000, it had gradually declined to 4.5 per cent by 2002-03 and the target for the current year is 4.0 percent of GDP. A number of factors have been responsible for the decline in the fiscal deficit, including the debt reprofiling, slow growth of public debt, decline in the interest rates, reduction in the development expenditure and an increase in non-tax revenues1. We may also note that in the process of reduction in the fiscal deficit, development expenditure has fallen to such a low level that it is not even sufficient for the provision of physical and social infrastructure2. Table 1: Budgetary Deficit in Pakistan (as percentage of GDP) Total Revenues

Tax Revenues

1987-88

17.3

1998-99

Public Expenditures

Budgetary Deficits

Primary Surplus

Total

NonDevelopment

Interest Payment

Development

13.8

26.7

19.8

6.9

8.5

-1.6

15.9

13.2

22.0

18.6

7.5

3.4

6.1

1.4

1999-00

16.3

12.9

22.5

19.9

8.3

2.6

6.6

1.7

2000-01

16.2

12.9

21.0

18.9

7.3

2.1

5.2

2.1

2001-02

17.2

13.2

22.8

19.3

7.1

3.5

5.2

2.5

2002-03

17.9

13.8

22.4

19.7

5.9

2.7

4.3

1.6

Source: Pakistan Economic Survey, various issues.

he long run viable solution for a reduction in the fiscal deficit is to make the tax structure elastic and progressive. Whereas over the 1990s, the direct tax structure was marred by withholding taxes that made most of such taxes essentially indirect, the replacement of such taxes with the proper income taxes would hopefully help in improving the elasticity of the tax structure and making it progressive. Major structural changes have been made in indirect taxes, the share of domestic taxes has increased and import duties are being levied only for protection purposes; tariff rates have been rationalised and the maximum import duty has been reduced to 25 per cent3. The share of customs duties in the total tax revenue declined from 40.7 per cent in 1987-88 to 21.0 in 1998-99 and further to 10.4 per cent in 2001-02. Similarly, the share of excise duties has declined from 18.8 per cent in 1987-88 to 8.6 per cent by 2002-03. The share of sales taxes, however, increased from just 9.3 per cent in 198788 to 35.6 per cent by 2002-03. In the future, the sales and income taxes will be the two main sources of tax revenue; while tariffs will be levied for protection purposes and excise taxes on products with an attempt to reduce consumption of certain products.

105

Table 2: Tax Structure of Pakistan (%age share of tax revenues) Direct Indirect Taxes Taxes Total Tariffs Sales Excise Duties

1987-88 1998-99 1999-00 2000-01 2001-02 2002-03

13.3 27.0 28.5 29.1 30.8 27.7

86.7 73.0 72.3 75.8 69.4 72.3

40.7 20.1 15.2 14.7 10.0 12.5

9.3 17.6 28.8 34.8 34.9 35.6

18.8 16.0 14.1 11.4 10.2 8.6

Source: Based on data derived from Pakistan Economic Survey, various issues.

As pointed out earlier, fiscal deficit and the money supply are interrelated. The pursuit of monetary policy is rather difficult when the financing of the fiscal deficit absorbs a large proportion of the increase in credit. Fortunately, because of the decline in fiscal deficit in recent years, there is little demand by the public sector for the bank credit and that has made it easier for the State Bank of Pakistan to meet the credit needs of the private sector at low interest rates without worrying too much about inflationary tendencies in the economy. For example, in 1998-99 money supply was contained, but credit to the private sector increased sharply.

owever, in the next two years, credit demand of the private sector slackened due to various reasons resulting in excess liquidity with banks. During the last two years, the money supply has increased rather sharply because State Bank of Pakistan purchased foreign exchange from the banks and open market. Despite the sterilisation,4 money supply increased at rather high rates of 15.4 and 18.0 per cent in 2001-02, and 2002-03, respectively. The increase in money supply so far has not fuelled inflation but if the money holders decide to spend, the inflation rates would tend to rise. Table 3: Growth Rate of Money Supply

(Percent) 1987-88 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Public Sector Borrowing 17.3 8.4 -11.8 13.3 -7.1 3.7 -11.6

Budgetary Support 13.3 9.5 -13.6 7.9 -6.0 2.9 -8.3

Private Sector 13.4 13.8 17.1 3.2 8.2 2.5 16.2

Money Supply (M2) 12.2 14.5 6.2 9.4 9.0 15.4 18.0

Source: Pakistan Economic Survey, various issues.

There have been important developments in the monetary sector over the last few years. The State Bank of Pakistan has been given full autonomy and it is using market based instruments to: control the money supply, auction the government securities through bids, develop secondary securities market, withdraw restrictions on the maximum and minimum rates of return on the deposits and improve the State Bank's regulatory and surveillance capacity. However, the infected portfolio of banks is still large and the decline in non-performing loans5 would help in reducing the spread

106

between deposits and lending rates and a further reduction in the interest rate which at present is around 7 per cent. Prudent monetary policy has helped in bringing

Table 4: Inflation Rate Period

Consumer Price Index 6.3 11.8 7.8 5.7 3.6 4.4 3.5 3.1

1987-88 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Wholesale Price Index 10.0 13.0 6.6 6.3 1.8 6.2 2.1 5.9

GDP Deflator 9.6 13.3 7.7 5.9 2.8 6.0 3.2 4.5

Source: Pakistan Economic Survey, various issues.

Whenever public debt, especially foreign debt, assumes significant proportions, resource inflows dry out and sometimes there is transfer of resources from the debtor counties. Investment tends to fall as the debt rises beyond safe limits, investible resources fall due to sharp increases in debt servicing, investors loose confidence, demand falls to low levels, interest rates start rising and there is massive capital flight. Since the debt servicing assumed alarming proportions in the mid nineties, it is no wonder that the debt problem has been haunting the policy makers.

ublic debt increased from Rs. 538 billion in 1987-88 to Rs. 3077 billion in 199899 and further to Rs. 3783 billion by 2000-01, i.e., 79.8, 104.7 and 113.5 per cent of GDP, respectively. Internal debt increased from Rs. 290.1 billion in 1987-88 to Rs. Table 6: Trends Balance of Payments 1392.5 billion in 1998-99 and furtherinto Rs. 1731 billion by 2000-01. Similarly, (Million $) external obligations increased from Rs. 247.9 billion in 1987/88, to Rs. 1614.4 billion Years Exports Imports Trade Remittances Current in 1998-99, and to Rs. 2059.5 billion in 2000-01. However, the total debt has Balance Account stabilised and, as a percentage of GDP, has declined to 95.1 per cent in the last couple 1987-88 4362 6919 -2557 2013 -1682 of years. A number8311 of factors12015 have been -3704 responsible for this turnaround. Firstly, there 1995-96 1461 -4575 have been smaller7528 budget deficits at least a part been financed 1998-99 9613 and -2085 1060of them have -2429 1999-00 8190than loans. 9602 Secondly, -1412 some of983 -1143written off, through grants rather the debt has been 8933 10202 -1269 1087 -513Third, there while 2000-01 some has been converted into debt-social sector spending swaps. 2001-02 9140 9434 -294 2389 +1338 has been a reduction in the 11425 interest rate-536 and the borrowing for repayment 2002-03 10889 4237 +3028 has been less costly. Fourthly, the appreciation of the rupee against the dollar has also meant a Source: Pakistan Economic various issues. reduction in foreign debtSurvey, denominated in the local currency.

Table 5: Degree of Openness in Pakistan's Economy

(% of GDP) 1987-88

1992-93

1997-98

2001-02

2002-03

Exports

11.6

13.2

13.6

15.5

15.8

Imports Degree of openness

16.7 28.3

19.6 32.8

16.6 30.2

16.0 31.5

16.6 32.4

Source: Pakistan Economic Survey, various issues.

a) Explicit Liabilities include Special US$ Bonds, FEBCs, FCBCs and DBCs; of which Special US$ Bond is a foreign liability, while FEBCs, FCBCs and DBCs are also foreign liabilities payable in Rupees. b) Repayment of principal includes repayment of foreign debt and short-term credit. Source: State Bank of Pakistan, Annual Report, 2002-03.

The debt servicing as a percentage of exports, foreign exchange earnings, or public

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108

revenues has declined significantly. This has been rather helpful in the reduction of the fiscal deficit and the creation of a fiscal space that can be used to increase development expenditure. As is well known, if the public investment is in the physical and social infrastructures, it crowds in private investment.

V. Growth, Savings, Investment and Productivity The growth of GDP depends on production factors such as labour and capital, and the levels of productivity. We may note that the productivity of labour depends on the human resources incorporated in labour. Similarly, accumulation of capital through new investments also results in embodied technology resulting in an increase in productivity levels. In this section, we examine the growth rates of output, savings and investment, human resource development and the growth of productivity.

Agriculture The main sources of growth in agriculture have been greater water availability, balanced use of inputs and better seed, especially of cotton. However, the drought has brought home the point that unless reservoirs are created, the sustained high growth rate of agriculture would not be possible. A shift in the policy focus towards the development of bio-technology, agricultural research and reorganisation of agricultural extension service for diffusion of technology in the shortest possible time, is absolutely essential for future growth of the agriculture sector. Institutional approaches for uplift of small farmers will also be of crucial significance for improvement in productivity. Besides, policy initiatives are absolutely necessary for the non-crop sector of agriculture which has suffered in the past due to neglect of the government.

rowth of GDP decelerated in the 1990s. Whereas in the 1980s GDP grew at a rate of 6.5 per cent, the growth rates decelerated to 3.2 per cent over the 1999-2002 period. Similarly, the growth rates of agriculture and manufacturing decelerated from 5.4 and 9.2 per cent in the 1980s to 1.0 and 4.9 per cent, respectively, during the 1999-2002 period. However, the growth rate of GDP increased to 5.1 per cent in 2002-03, and those of agriculture and manufacturing to 4.1 and 7.7 per cent. The large scale manufacturing sector registered a growth rate of 8.7 per cent. Both because of the increase in GDP and the sharp increase in worker' remittances, the per capita income has grown at a rate of 6.6 per cent. For the year 2003-04 the growth rate of GDP is expected to range between 5.5 and 6.0 per cent with manufacturing growth in the double digit. Table 7: Profile of Domestic and External Debt Total Debt 1. Domestic Debt 2. External Debt

FY 99 3,077.0 1,392.5 1,614.4

FY 00 3,336.8 1,578.8 1,682.7

FY01 3,884.5 1,731.0 2,059.5

(Billion Rs.) FY02 FY03 3,783.0 3,821.6 1,717.9 1,852.4 2,005.6 1,927.7

3. Explicit liabilitiesa 70.1 75.4 94.0 59.5 41.6 As Percent of GDP Total Debt 104.7 106.0 113.5 104.3 95.1 Domestic Debt 47.4 50.2 50.6 47.3 46.1 External Debt 54.9 53.5 60.2 55.3 48.0 TheExplicit factorsLiabilities that have been responsible 2.4 for the increase in growth GDP in 20022.4 2.7 rate of1.6 1.0 Total Public Debt Servicing 343.1 304.7 03 and 2003-04, despite the declining level of 366.3 investment340.3 rates, need431.2 to be examined Total Public Interest Payments 220.1 269.2 254.4 266.3 241.3 withi. a view to ascertain the sustainability trend. A number on Domestic 178.9 of the218.7 195.4 of factors, 199.6 mostly 198.0 Foreignside, have been responsible 38.0for growth. 44.9 Firstly, 51.2 61.1 39.8 the ii. demand better availability of water Explicit liabilities 3.2 5.6 7.8 5.6 3.5 has iii. resulted in good crops and 123.0 that has generated higher demand for 63.4 the Repayment of Principalb 97.1 85.9 164.9 manufacturing output. Secondly, the increase in exports by more than 22 per cent, Ratio of External Debt Servicing to Export Earnings 35.3 36.5 38.0products, 44.8led to better 28.8 generated by the demand for textiles and other exportable Foreign Exchange Earnings 23.6 23.4 23.7 26.5 16.0 utilisation the existing capacity. Ratio of TotalofPublic Debt Servicing to Thirdly, consumer financing resulted in an upsurge Taxdemand revenue for automobiles whose87.8 90.2 50 per cent. 54.8 in the production90.3 increased 77.1 by more than Total revenue 73.2 71.5 61.5 69.1 42.3 Fourthly, increase in the development expenditures and exports to Afghanistan of Total expenditure 53.0 51.7 47.4 52.2 33.9 construction material, especially cement, output. We 39.0 may Current expenditure 62.7 also helped 58.5 manufacturing 52.7 61.6

note, however, that the stimulation of demand can generate higher levels of output in the short-run, but for the sustained high growth of GDP the rate of investment must accelerate.

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Manufacturing The stagnation in the growth rate of manufacturing output until 2002-03 has been due to a number of factors which include: falling levels of investment, reduced effective protection after tariff rationalisation resulting in closure of a large number of industrial units, the increase inGrowth the price electricityFactor whichCost made Pakistani Table 8: Compound Ratesofat Constant manufactured products uncompetitive world the domestic 1980s 1987-88in to the1992-93 to market 1998-99and to in2002-03 1998-99situation, 2001-02severe shortages of market, smuggling, deteriorating 1992-93 law and order infrastructureGDP facilities, changing taxation of demand 5.1 as a result of 6.5 4.8 regimes, 4.2slackness3.6 Agriculture 5.4 3.7 4.9the sector. 1.0Increase in 4.1sales taxes deflationary policies and structural weaknesses of Manufacturing 8.2 4.4 3.6 4.9 7.7 on domestic production coupled with1.5high import duty on imports of raw materials Per Capita Income 3.7 0.7 1.5 6.6 and intermediate goods led to erosion of their competitive edge, especially against the Source: Based on data derived from Pakistan Economic Survey, various issues. smuggled goods. Pakistan's industrial sector is as concentrated as it was about 40 years back; food and textiles still account for almost 40 per cent of the output. The future growth of the sector is dependant on higher investment flows especially in the non-traditional sectors in which the country has comparative advantage. The investment in manufacturing industries have gone down from 4.7 per cent of GDP in 1992-93 to just 3.3 per cent of GDP in 2002-03.

III. Investment Policies and Trends 110

During the 1990s, the government provided various incentive schemes which were later withdrawn. However, the 1997 investment policy, which continues to be the

enterprises, telecommunication, public utilities, etc. However, with the privatisation of public monopolies, regulation has become essential and the government has come out with credible regulatory frameworks for power, telecommunications, gas and petroleum sectors.

VII. Growth of Productivity Levels

Table 9: Growth Rates in Agriculture Sector Period

Agriculture

1987/88-1992/93 1992/93-1997-98 1997/98-2000-01 2001-02 2002-03

3.7 5.6 1.7 -0.1 4.1

Major Crops 1.9 3.8 1.1 -1.8 5.8

Minor Crops 4.7 6.6 1.4 -1.8 0.4

Livestock

Fisheries

Forestry

5.8 7.9 3.3 3.7 2.9

5.3 2.1 2.5 -12.0 16.6

-1.5 -7.4 24.0 -1.3 8.8

The growth of output is the result of the higher application of inputs, and improvements in the levels of productivity. It needs to be noted that the main contribution towards growth in the developed world has been improvements in the productivity rather than the use of inputs. Whereas productivity increased at a rapid rate in the 1960s and 1980s when it grew at a rate of more than 3 per cent, the total factor productivity (TFP) decelerated in the 1990s to just 0.78 per cent. However, because of market-oriented reforms in the agricultural sector, TFP growth in the agricultural sector recovered to 1.52 per cent, and in the manufacturing sector it was 1.64 per cent.

Table 11: Trends in Investments Years

Source: Based on data derived from Pakistan Economic Survey, various issues.

Total Fixed Public Private Investment Investment Investment Investment

(%age of GDP) Share of private sector in fixed factor 46.5

1987-88

17.3

15.8

8.5

7.4

1992-93

20.6

19.0

9.0

10.0

52.5

1998-99

15.6

13.9

6.1

7.9

56.8

1999-00

14.4

6.0

8.4

58.3

2000-01

15.9

14.2

6.3

8.0

55.9

Total factor productivity 1.7 4.7 to 2.0 per 8.4 cent to the overall growth rate 2001-02 14.7has contributed 13.1 64.1 of the economy since the 1960s. The relative contribution of TFP in growth process 2002-03 15.5 13.1 4.5 8.6 65.6 ranges between 31 to 39 per cent. That these estimates are higher in comparison with Source: Pakistan Economic Survey, various issues. the other developing economies is evident from the following table.

Table 10: Growth Rates of Manufacturing Period Small Scale Large Scale 1987-88 8.4 10.6 1997-98 5.3 7.6 1998-99 5.3 3.6 1999-00 5.3 -0.01 2000-01 5.3 9.5 2001-02 5.3 4.9 2002-03 5.3 8.7 Source: Pakistan Economic Survey, various issues.

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Total 10.0 6.9 4.1 1.5 8.2 5.0 7.7

Whereas the growth in total factor productivity in Pakistan has been relatively higher, it needs to be noted that rising levels of TFP in manufacturing reflect extreme forms of inefficiency in the base year and growth is essentially catching up; learning by doing coefficients have been rather large. The high growth rates of productivity cannot be maintained unless there is a sharp increase in investment which brings new

112

Tableon 12:human Trends in Savings technologies and more emphasis resource development and Research and (As %age of GDP) Development (R&D).

Year National Savings Domestic Savings 198713.6 10.6 88 Productivity may increase either through improved resource allocation or by 1998-99 11.7 12.9 increasing the efficiency of the resources employed in various activities. Efficient 1999-00 14.1 15.8 15.0 16.9so that the resources resource allocation2000-01 requires removal of distortions in the system 2001-02 in which the 17.0 16.9 flow to those activities country has a comparative advantage. The 2002-03 19.4 16.2

efficiency of resource use depends on a number of factors. Firstly, the latest Source: Annual Report of the State Bank of Pakistan, various issues. technologies are embodied in the new machines and as such, higher investment levels imply a rapid increase in the technological change; second, investment in human resource development activities including, education, training, health, nutrition, administration, discipline, etc.- all these activities tend to improve the efficiency of labour- third, improvements in infrastructure result in lower production costs; fourth, learning by doing helps in a sharp increase in productivity. In this section we examine investment levels, human resource development, and infrastructure, while the estimates of learning by doing are available only for the manufacturing sector and for the 1960s only. The quality of human resources is the major determinant of productivity growth. Unfortunately, Pakistan has lagged behind in social sector development. The literacy levels, enrolments at various stages, basic health facilities, nutrition and other social services in Pakistan are far from adequate. Similarly, training facilities are not only inadequate they are not in line with demand. The future growth of productivity depends on investments in human resources and its proper utilisation. Even though the infrastructure has improved over time it still is far from satisfactory. Not only is it inadequate, it is also costly. For example, the price of energy for the industrial sector is one of the highest in the world and there is significant room for improvement in port facilities. Considering that the power prices paid to the IPPs would fall after 2007, the proportion of the oil fired thermal power station would be replaced with gas fired thermal station and rationalisation of power tariff, the possibilities of reduction in electricity tariff for the industrialists is quite bright. Similarly, the improvements in the facilities at Karachi and Qasim ports and the Table 13: Foreign Private Investment construction of Gawadar port would improve infrastructure.

Years Direct Portfolio Total 1987-88 --177.0 VIII. Employment Generation 1994-95 442.4 and Poverty 1089.9Levels 1532.3 Unemployment rates have increased sharply 221.3 over the last822.6 few years. The 1997-98 601.3 1998-99 376.0 27.3 403.3 unemployment rate has increased from 5.9 per cent in 1997-98 to 8.3 per cent in 1999-2000 469.9 543.4 2001-02. We note that more than half of the total73.5 current stock of the unemployed 2000-2001 322.4 -140.4 182.0 consisted of 2001-02 the short-term unemployed, while more than a quarter 484.7 -10.1 474.6 was in the 798.0 820.1 the chronic category of 2002-03 the transitory unemployed, while22.0 15 percent were

unemployed. Source: Pakistan Economic Survey, various issues.

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Because of the rising rate of unemployment, nominal wages have remained constant since 1998 for unskilled and construction workers. The real wage rates have fallen, resulting in deterioration in functional income distribution. Since the workers are generally poor while the rich own the capital stock, the distribution of income across various sections of population has also gone down.

Table 14: Trends in Total Factor Productivity during 1990s (Percent) Growth Rates GDP Residual Capital Labour Trends in poverty levels Overall 4.41 2.38 1.25 0.78 Poverty has increased sharply during the 1990s, though it has been exaggerated. It Agriculture 4.54 2.21 0.81 1.52 needsManufacturing to be noted that the estimates3.99 of poverty presented in Amjad 2.09 0.25and Kemal 1.64 (1997) to: for theContribution year 1992-93 are significantly lower than that of FBS or the World Bank and, Overall Aggregate Growth 53.97 28.25 17.78 as such, one cannot from 17.6 per cent in33.55 1987-88 to Agriculture Growthargue that poverty has increased 48.63 17.83 Manufacturing 32.6 per cent inGrowth 1998-99. For comparison the52.54 poverty line 6.26 must be41.20 the same. Sector

Nevertheless, the poverty 1993-99 have gone up from 26.6 to 32.2 per cent. Source: Kemal, Muslehuddin andlevels Qadir over (2002). Since growth rates fell further and unemployment rates increased, poverty levels have increased further during the 1998-2001 period. The incidence of poverty was higher in rural areas than in urban areas and has increased in both areas. The two main factors that determine the poverty level are rate of unemployment and per capita incomes [see Amjad and Kemal (1997) and Kemal (2003)]. Table 15: International TFP Comparisons Economy Period TFP Pakistan 1964-2001 1.70 Bangladesh 60s-1985 0.33 Sri Lanka 60s-1985 1.25 Indonesia 1960-94 0.80 Malaysia 1960-94 0.90 Philippines 1960-94 -0.40 Thailand 1960-94 1.80 Republic of Korea 1960-94 1.50 Contrary to general belief, poverty is not1960-94 a transitory phenomenon;1.50 only 31 per cent of Singapore Taipei, China 1960-94 2.00 the poor households in 1998-99 were able to move out of poverty. Two-thirds of the

poor households remained the(2002), state of poverty even afterand two years. Limited job Source: Kemal, Muslehuddin andin Qadir Basudeb & Bari (2000) Collin & Bosworth (1997) opportunities with low wages have added to the miseries of the poor households. The transition from unemployment to employment reduces the incidence of poverty while the movement in opposite direction, employment to unemployment, increases the poverty level.

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he sharp increase in per capita incomes holds promise for a reduction in poverty. However, future growth of per capita incomes depends on the rising levels of

Table 16: Unemployment Rates in Pakistan Year 1997-98 1999-2000 2001-02

Both Sexes 5.90 7.80 8.30

Male 4.00 6.10 6.70

Female 15.00 17.30 16.50

Source: Labour Force Survey, various issues.

Table 17: Trends in Real Wage Rate of Construction 1998 1999 2000 2001 2002

Unskilled Workers 116.5 121.1 114.5 112.8 112.3

Carpenter 185.3 236.1 226.3 224.0 217.9

Source: Based on Pakistan Economic Survey, 2002-03.

Table 18: Poverty Trends in Pakistan Head Count (Percentage) Total Year

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FBS

World Bank

1992-93 1993-94 1996-97 1998-99 2000-01

26.6 29.3 26.3 32.2 -

26.7 28.6 24.0 32.6 -

Planning Commission 30.6 32.1

Rural 1992-93 1993-94 1996-97 1998-99 2000-01

29.9 34.7 30.7 36.3 --

-33.4 -35.9 --

---34.7 39.0

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Urban 1992-93 1993-94 1996-97 1998-99 2000-01

20.7 16.3 16.1 22.4 --

-17.2 -24.2 --

---20.9 39.0

Source: Kemal (2003), Government of Pakistan (2003)

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118

Bangladesh: An Alternative Paradigm Dr Qazi Kholiquzzaman Ahmad

Purpose This paper reviews Bangladesh's socio-economic achievements and failures, examines the policy framework and suggests a way forward. Data used in the text is, unless otherwise specified, taken or computed from Statistical Tables 1-6. The rest of the paper is organised as follows: overview of development outcomes (achievements, past failures and future challenges), the prevalent policy framework, outlining an alternative approach, statistical tables, notes and references.

Development Outcomes Achievements There are several aspects in which Bangladesh has made impressive progress.

significant reduction has been achieved in the population growth rate. According to the Population Census 2001, the rate was down to 1.54 per cent from 2.15 per cent as revealed by the Population Census 1991. The reasons behind this achievement include educational progress, increased awareness and effective family planning programmes. The infant mortality rate per thousand live births was down to 57 in 2000 compared to 92 in 1991. Similarly, under-five child mortality rate per thousand live births declined from 151 in 1991 to 110 in 2000. The maternal mortality rate per thousand births fell to 3.2 per cent in 2000 from 4.7 per cent in 1991. The gross primary enrolment rate increased to 97 per cent in 2000 and further since then, compared to 77 per cent in 1990. Also, there has been a significant increase in the primary completion rate from 40.7 per cent in 1991 to 67 per cent in 2000. The female primary enrolment rate has recorded a faster growth compared to the overall enrolment rate, having risen to 97 per cent in 2000 from 66 per cent in 1991. There has also been a notable progress in the female literacy rate, rising to 40.1 per cent in 2000 from 25.5 per cent in 1990. Agriculture (crops, livestock and forest) grew at an impressive average annual rate of 4.6 per cent during 1996-2001. Although down to zero or negative in 2001-02, it recovered to an estimated 3.6 per cent in 2002-03. Food grain production (rice and wheat) reached an estimated 28 million metric tons (MTs) on gross basis and 25.3 million MTs on net basis (i.e. after deduction of 10 per cent for seeds, animal feed and losses) in 2002-03. According to the Food Planning and Monitoring Unit of the Ministry of Food, the food grain requirement for 2002-03 was 22.4 million MTs. (MoF, 2003, pp. 54, 56-57). There was, thus, a significant food grain surplus in that

119

year. Bangladesh has, according to official statistics, been food grain self-sufficient or nearly so, on a national basis, for the past several years- a major achievement compared to large deficits since liberation until well into the 1990s. However, food grain imports of certain quantities has continued- both commercial and in the form of food aid. Food aid is used for such purposes as food-for-work, particularly for infrastructure development, and food-for-education. The commercial import part is difficult to understand, since there have been surpluses out of domestic production in recent years1. But be that as it may, food insecurity continues to stare in the face of a large proportion of the population due to lack of access to land and related facilities for self production (at all or adequately) or lack of purchasing power to buy adequate food. The increased food grain production has been possible mainly as a result of increase in crop intensity, facilitated by expanded irrigation. Increased fertiliser use has also been a contributing factor. Agricultural credit has been an enabling support for many farmers. Above all, it is the ingenuity and hard work of the farmers that kept the agricultural sector moving forward.

angladesh has also made notable progress in disaster management, in particular in cyclone and flood management. Cyclone warning and cyclone shelter facilities established in Bangladesh have not only been saving lives and reducing losses in the country, but have also served as examples for other countries to learn from. In the case of flood management, combined responses by the people themselves, the government and voluntary organisations now come into play effectively in response to the onset of a major flood, to provide relief in terms of evacuation and supply of essential foods, other goods, necessary services and medicine during flood. The improvements in cyclone and flood management are indeed praiseworthy achievements in a country which is disaster-prone. Both cyclones and floods visit the country in a moderate way regularly and in a big way from time to time. There has been a significant increase in the country's technical capacity of generating flood forecasting. Improved cooperation with India and Nepal is required for data on runoff and rainfall from more places than are available now and well in advance for further improving the quality of forecast and increasing the lead time. Also, the dissemination mechanisms and outreach need to be improved for timely and effective warning to be provided to people regarding an impending flood. (Ahmad and Ahmed, 2003). Since the early 1990s, macroeconomic stability has been more or less maintained.

verall budget deficit has been fluctuating between 4 and 5 per cent of GDP since the early 1990s, except for 1993-94 and 1999-00, when it was 5.8 per cent and 6.1 per cent, respectively. Current account balance has been in deficit, fluctuating between 0.5 or so to 2.0 per cent of the GDP from the early 1990s until 2000-01, having been balanced in 1999-00. Over the past two years, it has, in fact, been positive, the magnitude being small though- 0.4 and 0.5 per cent in 2001-02 and 2002-03, respectively. These positive current account balances are largely due to very significant increases in remittances received from Bangladeshis working abroad. In fact, the trade balance has been in the negative, varying from around 5 to 7 per cent

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since the early 1990s.

interest in the private sector of Bangladesh.

he response of foreign direct investment (FDI) has been lukewarm to the various incentives provided, which include opening up of almost all sectors to FDI without having to go into partnership with Bangladeshi investors, generous profit repatriation and all the other facilities including tax holiday as provided to domestic industries. Reliable data on FDI are not easy to come by. There is a grey area in relation to registered and actualised FDI. In fact, only a small proportion of the registered FDI seems to materialise in terms of actual investment. Available data suggest that from negligible amounts in the early 1990s, the actualised FDI, largely in gas exploration, reached an annual amount of US$ 280 million in 2000 and US$ 328 million in 2002 (UNCTAD 2003, pp. 42, 251)2. The reasons include corruption, bureaucratic hassles and hindrances, political uncertainties, law and order problems, extortionism, underdeveloped infrastructure, underdeveloped capital market and continued failure of economic growth to accelerate.

he remittances reached US$ 3.062 billion in 2002-03, the largest source of foreign exchange receipts for the country and accounting for about 6 per cent of the GDP in that year. Compared to this, the net export earnings from readymade garments, which account for about two-thirds of the total national export earnings, were between US$ 2.29 million and US$ 2.52 million in 2002-03 (between 50 per cent and 55 per cent of the gross earnings, as import of clothes and other materials account for 45 to 50 per cent) (Ahmad 2004). The inflation rate has been under reasonable control since the early 1990s and was just over 5 per cent in 2002-03, having been about half of this on average, during the previous three years. In a developing country, an inflation rate of 5 per cent or so is not at all unhealthy. Foreign exchange reserve as of May 2003 was US$ 1.8 billion (MoF 2003, p. 207), accounting for about 2.6 months' imports, which is not too bad, although somewhat larger foreign exchange reserve accounting for about three months' imports is perhaps more desirable.

Failures and Challenges The average annual economic growth rate during the period since 1996 is somewhat larger compared to that during the period from liberation in 1971 until the mid-1990s. But it is still an uninspiring 5 per cent or slightly more. It is the healthy agricultural growth rate that has been the major contributing factor to the average annual economic growth rate of 5 per cent or so achieved since the mid-1990s. Growth in other sectors, including manufacturing, has been sluggish. A key reason behind the failure of the acceleration of the overall economic growth is the stagnation in investment. The investment ratio has been virtually stagnantaround 23 per cent of GDP- over the past several years. Private sector investment has slightly increased during these years, but that has been matched by a slightly declining public sector investment. The reasons for stagnating investment include the following:

omestic savings ratio has been virtually stagnant at around 18 per cent of GDP since 1997, although national savings ratio has shown a slightly increasing trend due to increasing remittances from abroad. Thus, the domestic savings ratio was higher by 0.8 percentage point and the national savings ratio by 1.9 percentage points in 2002-03 compared to 1997-98. As a proportion of GDP, contribution of the official development assistance (ODA) to domestic investment has been of just 2.0 per cent of GDP in recent years. The export regime remains extremely narrow. Only five groups of items- readymade garments including knitwear and hosiery (RMGs), frozen fish and shrimp, jute and jute goods, leather and tea- amount for about 80 per cent of the total annual export earnings of the country. As noted earlier, RMGs alone amount for about two-thirds of the total. Export expansion, therefore, has remained limited, thereby limiting foreign exchange availability. (MoF 2003, p.51). In fact, trade focused in a major way on import rather than productive investment and export remains the predominant

121

The government's total revenue collection has been less than 10 per cent of GDP until 2000-01, having marginally topped 10 per cent in 2001-02 (10.2 per cent) and 200203 (10.3 per cent, provisional). This is surely a poor performance. The reasons include ineffectiveness and corruption on the part of the revenue collection machinery and tax evasion by many tax payers, false statements and collusion with revenue collection officials. Other reasons for failure of the acceleration of economic growth include leakages of resources through corruption, wastage of resources due to inefficient and uncommitted public sector management, illegal transfer of resources aboard (via over-invoicing, under-invoicing, hundies), failure to mobilise local people's energies and local resources effectively, and under-utilisation of capacity and low productivity in many sectors. Shortages of skilled managerial and other personnel and workers and a non-participatory social environment are important constraining factors behind low productivity and poor mobilisation and utilisation of human resources and various other resources.

overty reduction, computed on the basis of basic needs approach, has registered a slow improvement since 1991-92 of about one percentage point a year. As a result, as of 2000, on basic needs considerations, 50 per cent of the population was poor and about a third extremely poor. Assuming that poverty reduction has continued at one percentage point a year since 2000, 47 per cent of the total population now lives below the poverty line and about 30 per cent is afflicted by extreme poverty. However, in proportional terms, there has been a significant improvement compared to the 1970s and 1980s, when below poverty line population accounted for three quarters or more of the total population. But in terms of the number of people, there has been little improvement as about 64 million people are currently poverty stricken, a number which is not very much less than the total population at the time of liberation.3

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The basic needs-based poverty calculation takes into account food requirements to provide 2122 Kcal per person/day and an amount of money to cover such other basic needs as clothing, shelter, basic education and basic healthcare. The measurement of extreme poverty is based on a lower amount of money allowed for basic needs other than food compared to that allowed for the overall poverty group, while food requirement used is the same for both the groups. But, if human dignity is used as the basis of the poverty line, which requires that people must have access not only to the minimum basic needs as enumerated above, but also to amenities of living such as good sanitary and environmental conditions, and equitable access to social, political, market and cultural opportunities, then a much larger proportion of the population (about 47 per cent) is poor.

here has been some improvement but stunting (height-for-weight), wasting (weight-for-height), and underweight (weight-for-age) among children of 6-71 months are still high. Thus, 41 per cent, 12 per cent, and 51 per cent of the children of this age group are below two standard deviations of the norms respectively, having declined since 1985-86 from 61 per cent, 15 per cent, 72 per cent, respectively. Land ownership pattern is highly skewed. Landownership distribution is available for 1996, which may have worsened since then. About 55 per cent of the rural households own less than half an acre of land each, with 6.4 per cent owning no land at all. Small holders owning 0.5 to 2.5 acres per household account for another 31 per cent, while 14 per cent are medium to large land-holders. Since land is the main source of food and income in rural Bangladesh, 86 per cent of the rural households are in a bad shape, with about half of them in precarious condition4. Employment opportunities remain limited, particularly outside agriculture so that the poorer segments of the rural population do not have access to adequate purchasing power to ensure their minimum household food security, let alone seeking an improvement in their living conditions. Many of the desperately rural poor move to urban areas, often to Dhaka and other large cities, looking for opportunities for improving their living conditions, but often end up in slums. 路 Poverty is concentrated among the landless and land-poor. Other groups include small artisans, fishermen, urban slum dwellers working as rickshaw pullers or in different casual and low paid jobs, and people living in coastal areas. Also, socioeconomic disparity is glaring and increasing. The income share of the bottom 10 per cent of the population declined from 6.5 per cent in 1991-92 to 6.2 per cent in 2000, while that of the top 20 per cent increased from 44.8 per cent in 1991-92 to 52.0 per cent in 2000.

isparity permeates not only the economic arena but also social and political arenas. Thus, the poverty-stricken people are truly excluded and, hence, deprived of opportunities for enhancing their capabilities through education, training, and healthcare and improving their living conditions through self-employment, wageemployment, ownership of assets and socio-political-cultural participation.

Prevailing Policy 123

Bangladesh joined other countries around the world in 1987 in implementing economic reform programmes as enjoined by the Washington Consensus (WC). The WC was developed by the World Bank and the IMF with support from USA and other developed countries in the 1970s to promote neo-liberal free market dispensation through privatisation, deregulation, and globalisation. To that end, stabilisation and structural adjustment programmes were designed, which were required to be implemented by all developing foreign-aid seeking countries. Economic growth was once again targeted as the quintessential developmental goal, with poverty reduction and improved income distribution relegated to the background. The initial economic reforms package was later expanded to include other aspects of society in response to unpalatable experiences generated in many reforming countries, such as non-acceleration of growth, lack of progress in the private sector, domestic market-oriented existing local industrial production suffering in the face of competition from imports, export expansion facing strong disadvantageous reality, widening disparity, social costs in terms of unemployment and the increase in the number of poor people, notably in reforming African countries but elsewhere. Thus, emphasis on social sectors (education, training, health, gender issues, family planning) and institutional, administrative, and legal reforms consistent with a liberalised economy and the establishment of 'safety nets' for the vulnerable people was placed in the reform package. Also, emphasis was shifted to the effectiveness of governance from the earlier unqualified rolling back of the government. Another important element introduced has been environmental protection and enhancement. Poverty reduction, however, remained to be achieved as a consequence of growth and was not considered a direct goal of the paradigm until 1999.

owever, in view of mounting criticisms of the paradigm for the failure to reduce poverty substantially, increasing disparity among countries and within countries and persisting limited opportunities for poor people and poor countries to make progress, poverty reduction was included as a direct goal in 1999. In that year, all developing foreign-aid seeking countries were asked by the World Bank and the IMF to prepare their Poverty Reduction Strategy Papers (PRSPs) once again as an aidconditionality. However, the broad policy framework of privatising not only production and distribution activities but also utilities and services of all types, including electricity, water, telecommunications, railways, education and health, remained the cornerstone of the paradigm. Bangladesh has prepared its Interim Poverty Reduction Strategy Paper (I-PRSP) and is now working on the final version within the same policy framework. Embarking in 1987 on the WC reform programme, Bangladesh has been pursuing the path enthusiastically since the early 1990s, subscribing to the whole package of reforms as it evolved over the years. As noted earlier, the country successfully achieved and, more or less, maintained macroeconomic stability since the early 1990s. But that success could not be translated into faster economic growth, much less into accelerated poverty reduction. Moreover, the glaring socio-economic disparity has been accentuated further and environmental degradation has continued unabated.

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to be based on the prevailing ground realities. The key ground realities to be addressed include widespread poverty; glaring and increasing socio-economic disparity; social, political, economic exclusion; pervasive corruption and criminalisation of politics and economics; centralised and poor governance; virtually non-existent local government; high rate of illiteracy and low quality of education among people at large; low human capability (in terms of education, training, health and access to resources and various facilities); rampant unemployment and underemployment; low productivity; absence of effective support for small and medium enterprises, which can spread throughout the country involving people of small means; unabated degradation of the environment; and soil quality degradation in the agriculture sector. These realities are either in contradiction to the letter or spirit or both of the ruling neo-paradigm or are so much subordinate to the paradigm's dominant thrusts or the interests of the dominant groups that they are talked about but, by and large, ignored in practice.

he precipitous reduction of import tariff rates in the early 1990s, the import unweighted average from 89 per cent in 1990-91 to 36 per cent in 1993-94 and the import weighted average from 42 per cent to 24.1 per cent in 1993-94, without allowing time and facilities to local industries to enhance their competitive ability, has put many local industries- particularly in the small and tiny sectors- into severe disadvantage viz-a-viz imports coming from relatively more efficient producers in other countries. The tariff reduction process continued since then, and (import) unweighted and weighted tariff rates were respectively down to 17.13 and 9.73 per cent by 2001-02. The pace and pattern of tariff reductions introduced were out of step with the prevailing realities related to manufacturing and marketing inefficiencies obtained in many domestic industries. As a result, in certain cases, domestic industry had to close down, and, in other cases, possible new units or expansion of existing units could not be established. However, some mitigation in certain cases has been available in terms of supplementary duties and sales tax imposed on imports. It is not argued here that indiscriminate protection is provided to all industries indefinitely. What is argued is that industries with potential for growth and export expansion should be identified and protected as appropriate for a certain period of time. But this has not been done in Bangladesh. It may be possible to find ways of appropriately assisting such industries even now.

In the proposed approach, market is important but balanced roles of market and state are called for. Reforms are essential, but the present reform agenda must be recast based on the prevailing realities on the ground as indicated above and guided by the dynamics of a paradigm shift to sustainable development and participatory democracy.

rivate sector's ability (financial, strategic planning, human capabilities) remains limited in relation to the lead role assigned to it in the ongoing paradigm. The sector is constrained by its trade orientation and persisting difficulties posed by less than efficient banking services and underdeveloped capital market. It is also seriously image-challenged due to the persisting loan default culture. The efforts aimed at governance reforms have not succeeded much. Lack of transparency and accountability, lack of rule of law, bureaucratic hindrances and procrastination, lack of coordination among various ministries and agencies, lack of political focus on real issues and corrupt practices all around remain pervasive. It seems inherent in the dominant paradigm, which emphasises social division, that the power elites are not genuinely interested in reforms to promote good governance, because that would constrain their ability to seek benefits through abuse of power. The basic problem with the ruling paradigm is that it is a divider of society. It enables the power elites (economic, political, bureaucratic, military, professional) to acquire more wealth as well as market, political and social power. The poorer segments of society are expected to be either protected by safety net programmes or to benefit from 'trickle-down' effects of economic growth. Trickle-down effects are of little avail, as had been the case in the pre-reform period. In reality, the poorer segments of the population remain deprived and excluded.

An Alternative Approach The alternative approach aimed at consolidating and building on the impressive achievements in several respects and breaking out of the trap characterised by least development, persisting widespread poverty, and sharp social division has necessarily

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he concept of sustainable development, places the human being, rather than capital, as is the case in the currently ruling paradigm, at the centre of policies and programmes are undertaken to reduce socio-economic disparity (between the rich and the poor and between men and women) and promote participation of people at large in all processes- social, political, economic, environmental- of social transformation. A crucial galvanising role of the cultural realities in promoting social cohesion is recognised, which are brought into play. Participatory democracy ensures equitable, active participation of people at large in the social transformation processes. To that end, it calls for the institutionalisation of democracy at all levels of society, including through appropriate devolution of political power to each level and promotion of vertically and horizontally coordinated dynamic social capital (policies, institutions, norms, values, ethics linkages) throughout society. The proposed approach is thus guided by the vision to ensure equitable involvement of all citizens in the social transformation processes, within a participatory democratic framework. Obviously, a core concern relates to the promotion of social inclusion and cohesion to replace the present sharp social division as between the people at large on the one hand, and the power elites, on the other.

t is necessary for this approach that there are effective interactions across macro and micro levels so that macro policies are formulated by taking into account the realities faced by the country from within and outside, and their implications work through different levels of society, central to local/microin such a manner that appropriate activities at the local spaces are properly promoted by the macro framework involving policy, resource, and institutional support. The macro

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framework in turn should be adjusted on the basis of feedback from the local spaces. he paradigm shift, as proposed, will create conditions for and facilitate the release of the energies of people at large by opening up opportunities for their capability development and equitable participation in the social transformation processes and benefits, the maximisation of resource mobilisation, and an effective utilisation of both the mobilised human power and financial and material resources at all levels of society, leading to accelerated, equitable, sustainable national progress.

The conceptual basis and directional imperatives of the proposed alternative approach have been outlined above. If the mindsets within the opinion forming, policy making, and policy implementing circles- political, bureaucratic, professional- changed in favour of this approach, the policy, programme and implementation details should not be difficult to formulate and put in place. (Dr Qazi Kholiquzzaman Ahmad (Q. K. Ahmad), an economist, is currently the chairman of the multi-disciplinary research organisation Bangladesh Unnayan Parishad (BUP) and the President of the Bangladesh Economic Association (BEA), Dhaka).

Statistical Tables Table 1 : Bangladesh Macroeconomic Indicators (% of GDP) Indicator Consumption Public Private Domestic savings National savings Total investment Public Private Total revenue Total public expenditure Revenue exp. ADP* Other exp. Overall budget deficit (excluding grants) Overall budget deficit (including grants) Total public financing Net foreign financing Grants Loan Repayment of capital Internal financing Bank credit Bangladesh bank Commercial bank Public loan (net) Import Export Trade deficit Current amount balance Net transfer from abroad GDP growth rate (%) Inflation (%) Population (million)

1991-92 1992-93 1993 -94 1994 -95 1995-96 1996 -97 1997-98 1998-99 1999 -00 2000-01 2001 -02 2002 -03 86.1 4.5 81.7 13.9

87.7 5.0 82.7 12.3

86.9 4.9 82.0 13.1

86.9 4.6 82.2 13.1

85.3 4.4 80.9 14.7

84.1 4.4 79.7 15.9

82.6 4.7 77.9 17.4

82.3 4.6 77.7 17.7

82.1 4.6 77.5 17.9

82.0 4.5 77.5 18.0

81.8 5.0 76.8 18.2

19.3 17.3

18.0 17.9

18.8 18.4

19.1 19.1

20.0 20.0

20.7 20.7

21.8 21.6

22.3 22.2

23.1 23.0

22.4 23.1

23.4 23.1

23.7 23.2

7.0 10.3 8.3 13.0

6.5 11.5 9.1 13.0

6.6 11.8 9.2 15.0

6.7 12.4 9.8 14.4

6.4 13.6 9.2 13.9

7.0 13.7 9.6 13.3

6.4 15.3 9.5 12.9

6.7 15.5 9.0 13.6

7.8 15.6 8.5 14.5

7.2 15.8 9.6 14.8

6.4 16.8 10.2 14.9

6.7 16.5 10.3 14.5

6.6 4.7 1.6 -4.7

6.8 5.0 1.2 -3.8

6.7 6.5 1.8 -5.8

6.7 6.6 1.1 4.6

7.0 5.9 1.0 -4.7

6.8 6.0 0.5 -3.7

7.1 5.4 0.4 -3.4

7.5 5.6 0.4 -4.6

7.7 6.4 0.4 -6.1

8.1 6.3 0.4 -5.1

8.3 5.5 1.1 -4.7

8.4 5.6 0.5 -4.2

-2.1

-1.3

-3.7

-2.2

-3.0

-2.0

-2.1

-3.2

-4.5

-4.1

-3.7

-3.4

6.4

5.6

4.4

4.5

4.2

3.9

4.4

5.3

4.8

4.7

4.2

4.5

3.8

2.8

2.3

2.5

2.0

2.1

2.3

2.6 2.5 -0.7

2.6 2.7 -0.7

2.1 2.5 -0.8

2.3 2.2 -0.8

1.7 1.9 -0.8

1.7 1.8 -0.7

1.3 1.7 -0.7

1.3 1.9 -0.7

1.5 1.8 -0.8

1.1 1.8 -0.9

1.0 2.0 -0.9

0.8 2.5 -1.0

1.9

1.2

1.8

0.7

1.8

1.5

1.6

1.9

2.8

2.6

1.8

1.2 -0.4

0.2 0.2

0.6 -0.3

0.0 0.2

1.0 1.1

0.9 0.8

0.6 0.4

0.9 0.5

1.5 0.7

1.1 0.8

0.9 0.7

0.4 -1.0

1.6

0.0

0.9

-0.2

-0.1

0.1

0.2

0.4

0.8

0.4

0.2

1.4

0.7

0.9

1.2

0.7

0.8

0.5

1.0

1.4

1.7

1.4

6.3 11.3 -4.9 -0.4

7.4 12.7 -5.3 -0.8

7.5 12.4 -4.9 -0.3

9.1 15.4 -6.2 -1.8

9.5 16.9 -7.3 -2.3

10.4 16.9 -6.5 -1.3

11.7 17.1 -5.4 -0.6

11.6 17.5 -5.9 -0.9

12.2 17.8 -5.6 0.0

13.7 19.9 -6.1 -2.2

12.6 18.0 -5.4 0.5

11.8 17.4 -5.6 0.4

3.4

4.9

6.8

6.9

4.0

3.6

3.4

2.9

3.6

3.0

3.5

4.1

5.0

4.6

4.1

4.9

4.6

5.4

5.2

4.9

5.9

5.3

4.4

5.3

4.6 113.0

2.7 114.9

3.3 116.9

8.9 118.8

6.7 120.8

2.5 122.6

7.0 124.5

8.9 126.3

3.4 128.1

1.6 129.9

2.4 131.6

5.2 133.4

Source: MoF 2003, pp. 166-167 * ADP=Annual Development Programme

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Table 2: Millennium Development Goals: Bangladesh Status and Targets

Table 4 Percentage Distribution of Income Accruing to Households in Groups (Deciles), 199192-2000

MDG 1: Eradicate extreme poverty and hunger; 2015 target =halve 1990 $1 a day poverty and malnutrition rates 1991 - 92 2000 2015 Target Upper poverty line Lower poverty line Squared poverty gap: Upper poverty line Lower poverty line

58.8 42.7

49.8 33.7

29.4 21.4

6.8 3.9

4.6 2.3

3.4 2.0

MDG 2:Achieve universal primary education; 2015 target = net enrollment to 100 1990 2000 Gross primary enrollment rate (%)

77 1991

97 2000

Primary completion rate (%) 40.7 67 MDG 3:Promote gender equality; 2005 target = education ratio to 100

Household income groups (deciles) Total national Lowest 5% Decile-1 Decile-2 Decile-3 Decile-4 Decile-5 Decile-6 Decile-7 Decile-8 Decile-9 Decile-10 Top 5% Source: BBS 2000, p.12

2015 100 2015 100

Female primary enrollment rate

1991 66

2000 97

2015 100

Female literacy rate

1990 25.5

2000 40.1

2015 100

Infant mortality rat (per 1000 live births)

151

110

1990-91 92

1997-98 57

2015 31

4.7

3.0

30.8

Census year 1974 1981 1991 2001

1.2

53.8

100

MDG 7: Ensure environmental sustainability 1990-91 2000

2015

Forest area as percentage of total area

100.0 0.9 2.4 3.8 4.5 5.2 6.1 7.1 8.4 10.4 13.9 38.1 28.7

Growth rate (exponential) 2.50 2.33 2.15 1.54

End Notes

10.2

Table 3: Impact of Tariff Reforms on Import Tariff Rates, 1990-2002 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

100.0 0.9 2.2 3.5 4.5 5.4 6.4 7.5 9.2 11.4 15.4 34.7 23.6

Source: BBS 2003, p. 24

Source: World Bank 2003, p.71

Unweighted average % 89.0 57.5 47.4 36.0 25.9 22.3 21.5 20.7 20.3 19.5 18.6 17.13

100.0 1.0 2.6 3.9 5.0 5.9 7.1 8.5 10.1 12.1 15.6 29.2 18.9

Table 6: Population Growth Rates, 1974-2001

MDG 6: Combat HIV/AIDS, malaria and other diseases; 2015 target=halt, and begin to reverse, AIDS 1990 2000 2015 Contraceptive prevalence rate (% of women ages 15-49)

2000

Upper poverty line Lower poverty line 1990 - 92 1995-96 2000 1991-92 1995-96 2000 National 58.8 51.0 49.8 42.7 34.4 33.7 Urban 44.9 29.4 36.6 23.3 13.7 19.1 Rural 61.2 55.2 53.0 46.0 38.5 37.4 Source: World Bank 2003, p. Note: CBN=Cost of basic needs

MDG 5: Improve maternal health; 2015 target = reduce 1990 maternal mortality by three-fourths 1990-91 1997-98 2015 Maternal mortality rate (per 1000 live births)

1995- 96

Table 5: Trends in CBN Poverty Ratio (Headcount rate)

MDG 4: Reduce child mortality; 2015 target = reduce 1990 under 5 mortality by two-thirds 1990-91 2000 2015 Under-5 mortality rate (per 1000 live births)

1991-92

Import weighted average% 42.0 24.1 23.6 24.1 20.8 17.0 18.0 16.0 14.1 13.8 15.1 9.73

2. 3.

Other sources, including the United Nations Fund for Population Activities (UNFPA), put the population size significantly higher than the 2001 Population Census-based figures, at 146 million as of 2002-03 (as opposed to 133.4 million). In that case, the overall food grain requirements would be higher by over 2 million MTs. If the total population (see note 1) of 146 million is considered, the number of poor people would go up to 69 million, very close to the total population at the time o Liberation. The FDI inflow of US$ 328 million in 2002 was financed as follows: 50 per cent by equity, 31 per cent by reinvested earnings, and 19 per cent by intra-company loans. As against US$ 328, Bangladesh Bank reports an amount of US$ 58 million on balance-of-payment basis for 2002 (UNCTAD 2003, page. 42). Unemployment, as proportion of the total available person days a year [i.e. labour force x 300 (days) x 8 (hours a day)] is very high. Although a reliable figure is not available, about 40 per cent is usually mentioned. Both illiterate and literate people suffer from unemployment and underemployment, particularly in rural areas. Moreover, the large proportion of the employed population is engaged in urban informal and rural sectors, in which wages and salaries are low.

Source: Ahmad 2000, p.58; MoF 2003, p.45

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Bibliography l Q. K. Ahmad, 'Bangladesh's Development Strategy and the Role of External Assistance,

German Assistance in Particular', in A.K.M.A Sabur (ed.), Development Cooperation at the Dawn of the Twenty First Century: Bangladesh-German Partnership in Perspective, (Dhaka: Bangladesh Institute of International and Strategic Studies (BIISS), 2002). l Q. K Ahmad and A. U Ahmed, 'Regional Cooperation in Flood Management in the GangesBrahmaputra-Meghna Region: Bangladesh Perspective' in Natural Hazards, (The Netherlands: Kluwer Academic Publishers, 2003), pp. 181-198. l Q. K. Ahmad, 'Remittances: A Major Thrust is Feasible', The Daily Star, Dhaka, 9 February, 2004. l Bangladesh Bureau of Statistics (BBS), Government of Bangladesh (GoB), Preliminary Report of Household Income and Expenditure Survey 2000, Dhaka, December 2001. l BBS 2003, GoB, Ministry of Planning, Population Census 2001, National Report (Provisional), July 2003. l Ministry of Finance (MoF), GoB, Bangladesh Economic Review 2003 (Bangla version), Dhaka, June 2003. l United Nations Conference on Trade and Development (UNCTAD), World Investment Report, FDI Policies for Development: National and International Perspectives, New York and Geneva, 2003. l World Bank, Bangladesh: Development Policy Review, Report no. 26154-BD, December 2003.

Sri Lanka: Peace and Economic Reforms Dushni Weerakoon

Introduction Sri Lanka initiated an economic liberalisation programme in 1977- marking a radical departure from an inward-looking, controlled-economy approach to a liberalised, export-oriented strategy that laid the foundation for far reaching reforms in almost all spheres of economic activity. Although during the following decade the reforms transformed the Sri Lankan economy- moving it away from a predominantly agriculture base to an increasingly industrialised and services oriented one- the results during the decades of neo-liberal policies have, by and large, been mixed. The under-performance of the economy has been blamed primarily on the costs incurred by two decades of a prolonged ethnic conflict in the country1. In 2001, the economy experienced its worst year of performance since the country gained independence in 1948, recording a sharp contraction in GDP growth. It was a culmination not only of rising defence expenditures and adverse external conditions, but also of heightened political instability2. In the midst of the economic crisis, the country saw the election of a new government into office in December 2001 whose key objective of resuscitating a deteriorating economic situation centred around efforts to resolve the country's long-standing ethnic conflict and thereby build donor and investor confidence in the economy.

he strategy paid off, albeit to a limited extent. A ceasefire brokered between the newly elected United National Front (UNF) government and the Liberation Tigers of Tamil Eelam (LTTE)- the main protagonists for separatism in the North and East of the country- resulted in a return to some form of 'normalcy' in most parts of the country. The government was also successful in having its policies- both on the political and economic front- endorsed by international financial institutions and the donor community. However, there was little doubt from the outset that major challenges would lie ahead in building mass support for a 'peace deal' that could involve a substantial degree of political devolution in the country and that the government's ability to build support for its peace efforts would be critically dependent on its performance in the economic arena. The complexities of the challenges facing the country have been heightened by the decision to call for snap elections in April 2004, four years before the term of the government was to end. In this climate of uncertainty, this paper attempts to assess Sri Lanka's current economic performance, and the prospects for sustained growth in the medium term in the context of recent political developments in the country.

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The Reform Process Sri Lanka's experiment with market reforms remained limited and partial in nature in the 1980s (though extensive in comparison with the previous policy regime). It included many of the standard reforms of a structural adjustment programme, including liberalisation of trade and payments, rationalisation of public expenditure, de-control of prices and interest rates, promotion of private sector development, foreign investment promotion and financial sector reforms3. While the pace of reforms slowed down considerably from the mid 1980s as the country became embroiled in social and ethnic conflict, there was to be no significant reversal of policy. In fact, the government adopted a 'second' phase of reforms in the late 1980s in order to rejuvenate a flagging economy battered by civil strife. And despite a change of government in 1994, Sri Lanka's commitment to a liberal, open economy continued unabated. In fact, it was to be the first time in the country's postindependence history that a change of government did not herald a reversal of economic policy, generating optimism that a broad convergence on economic ideology between Sri Lanka's major political parties would bring about a measure of policy consistency in the future4. The various phases of reform have seen a significant structural transformation of the economy. The share of agriculture in GDP has declined from roughly 30 per cent at the time reforms were initiated in the late 1970s to 20 per cent by late 1990s. Concurrently, the shares of industry and services sectors have risen, with services dominating with a share in excess of 50 per cent of GDP. Not surprisingly, Sri Lanka's economic growth in the 1990s has come to be driven primarily by the services sector. Despite the changes effected, Sri Lanka's experience with an open, liberal economic policy regime has had its critics. The debate reflects fundamental divisions about the pace and sequence of structural adjustment reforms; the desirability of 'shock therapy' approach versus a more 'gradualist' approach to policy reforms. For some, the staggered and slow pace of the liberalisation process in Sri Lanka- particularly in areas of trade policy and privatisation- in itself has stunted the outcome of liberalisation reforms (Lal and Rajapatirana, 1989; Athukorala and Rajapatirana, 2000). Others have argued that inherent tensions between the stabilisation and structural adjustment programmes in timing, sequencing and problems of transition played a key role in the staggered implementation of the liberalisation process, and that such conflicting tensions in turn imposed domestic social and political pressure on the reform agenda (Dunham and Kelegama, 1997). In fact, perceptions of inequity in access to the benefits of market-driven policies are argued to have been a contributory factor in heightening social and political tensions in the country in the latter part of the 1980s (Dunham and Jayasuriya, 2001).

n response to the social upheaval experienced towards the end of the 1980s, the government adopted a considerably more populist and expansionary policy stance during the 'second wave' of liberalisation during 1990-91. The policy agenda included an ambitious poverty alleviation programme (the Janasaviya Programme) that sought to address the issue of poverty directly, rather than merely leaving it to the 'trickle down' effects of accelerated GDP growth. The government's efforts were

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supported by an IMF/World Bank Enhanced Structural Adjustment Facility (ESAF) with renewed emphasis on macroeconomic stability and further structural reforms, but retaining the core elements of the poverty alleviation programme. While the economy did indicate an improved outcome in terms of GDP growth in the two decades of liberalisation, most data suggest that poverty may not have changed much over the period (World Bank, 2002). Sri Lanka's experience in fact, is broadly in line with emerging international evidence that the prescribed orthodox macroeconomic policies of the IMF/World Bank had limits in terms of how far it could take countries on the path toward equitable growth.

he mixed results achieved under neo-liberal programmes have also come to be acknowledged by international financial institutions. While stabilisation and structural adjustment were considered to have had a measure of success, their inability to ensure sustainability of renewed growth and address core concerns of reducing the poverty gap within and between nations were being questioned. While poverty alleviation remained a core concern, the nuance was more on the increase in inequality and its consequences5. With the emphasis on closing the disparity between the rich and poor countries, the search for new answers recognised the need for a broader set of reforms- referred to collectively as 'second generation' reformsfocused around the need to develop the institutional capacity for reforms. Questions on the structure of the right institutions, improvement of the administrative, legal, and regulatory functions of the state, and incentives and actions required for private sector development were key concerns. Nonetheless, international financial institutions such as the IMF and the World Bank have been at pains to argue that the 'first' and 'second' generation reforms were not sequential and early attention to monetary policy, and growth and stability are seen as preconditions for attacking the question of poverty through a broader set of reforms aimed at sustainable and equitable growth. The IMF and the World Bank have, therefore, created a new lending programme called the Poverty Reduction and Growth Facility (PRGF) replacing the existing Enhanced Structural Adjustment Fund (ESAF) as an answer to their critics. Its aim is to broadly explore alternative approaches to the reform programmes and to commit to poverty reduction as an explicit goal of lending and macroeconomic policies.

Current Performance Sri Lanka experienced a fairly volatile period of economic growth in the latter half of the 1990s that was to culminate with the country's worst year of economic performance in 2001. Not only was the country burdened with intermittent drought conditions that lowered agricultural production and contributed to power shortages, but global economic conditions were also volatile with the East Asian financial crises of 1997-98 and thereafter, the general slowdown in the global economy. In addition, renewed fighting in the North and East of the country6 strained fiscal management to the point that Sri Lanka had to seek IMF balance of payments (BOP) assistance in 2001.

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Table 1: Selected Macroeconomic Indicators 1998

1999

Population growth Per capita GNP Unemployment

% $ %

1.3 865 9.2

1.5 851 8.9

2000 1.4 881 7.6

GDP growth Agriculture Industry Services

% % % %

4.7 2.5 5.9 5.1

4.3 4.5 4.8 4.0

Investment Savings

% of GDP % of GDP

25.1 19.1

Govt. expenditure Govt. revenue Fiscal balance Public debt DSRa

% of GDP % of GDP % of GDP % of GDP %

Rate of inflation Interest rateb Exchange rate ASPIc

% % Rs/US$ 1985=100

ASIAN

income instruments.

2001 1.4 826 7.9

2002 1.5 858 9.2

6.0 1.8 7.5 7.0

-1.5 -3.4 -2.1 -0.5

4.0 2.5 1.0 6.0

27.3 19.5

28.0 17.4

22.0 15.8

21.3 14.6

26.3 17.2 9.2 90.8 13.3

25.2 17.7 7.5 95.1 15.2

26.7 16.8 9.9 96.9 14.7

27.5 16.7 10.8 103.2 13.2

25.4 16.5 8.9 105.3 13.2

9.4 15.0 67.8 597.3

4.7 13.5 72.1 572.5

6.2 20.0 80.1 447.6

14.2 14.0 93.2 621.0

9.6 11.8 96.7 815.1

he recovery on the export front, particularly of manufactured exports, was less impressive. The Sri Lankan economy retains a structural weakness in its overwhelming dependence on the garments sector, accounting for over 40 per cent of total industrial output and 50 per cent of export earnings. Given a high concentration of markets (with the U.S. market alone accounting over 60 per cent of exports), the garments sector remains highly vulnerable to external demand conditions. While there were promising indications of a recovery in export earnings from the latter half of 2002, the international competitiveness of the sector is of concern as it prepares to meet the challenges of a quota free environment from 2005. The Sri Lankan garments industry has primarily been quota driven and has benefited from the Multi Fibre Arrangement (MFA). With the anticipated phase-out of the MFA at the end of 2004, the outlook for the sector remains fairly bleak. Even on a global scale, Sri Lanka's garment export earnings have lagged behind other competitors (Table 2). Countries such as Bangladesh and Mexico which were earning comparable amounts from garments exports in 1990 have improved their position considerably in relation to that of Sri Lanka's garments sector earnings in the 1990s.

Exports $ million 4798 4610 5522 4817 4699 Imports $ million 5889 5979 7320 5974 6106 Current A/C on BOP % of GDP -1.4 -3.6 -6.4 -1.5 -1.6 FDI $ million 137 177 173 82 230 Portfolio $ million -24 -13 -45 -11 25 External assets months of imports 5.9 5.2 3.5 4.5 4.9 Tourist arrivals No. 381063 436440 400414 336794 393171 Notes: a. DSR=Debt Ser vice Ratio (percent of exports of goods and services); b. Reverse Repo rate; c. ASPI=All Share Price Index. Source: Central Bank of Sri Lanka, Annual Report, various issues.

evertheless, in overall terms, Sri Lanka appeared on the road to regaining macroeconomic stability and renewed growth momentum. However, the underlying political instability that had dogged the government since its election, manifested in November 2003 with a decision by the Executive President to wrest control over three key ministries of the government (including the all important one of defence). In a follow up action, the President who has authority under the Constitution to dissolve Parliament after one year in office, exercised her prerogative and called for snap elections in April 2004. The uneasy cohabitation between the President and Parliament that had generated some degree of uncertainty (given the looming threat of dissolution of Parliament) has opened a new chapter in Sri Lanka's economic and political future.

The Challenges Ahead Whichever government is elected into office, there are fundamental challenges to be met on the economic front. While estimates of poverty levels in the country differ, a

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widely accepted conservative estimate is that nearly 25 per cent of Sri Lanka's population remains below the poverty line (GOSL, 2000). Although the incidence of 10.

11. 12. 13. 14.

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beginnings. The exclusion of the LTTE from a pre-donor conference in Washington on the grounds that it was a proscribed 'terrorist' organisation in the US was to be start of the LTTE initiatives to signal a withdrawal from peace talks. To support its fiscal policy stance, a Fiscal Management Responsibility Act (FMRA) setting forth a 3-year budget framework, 6 month reporting responsibilities and provision to safeguard against measures having an adverse pre-election fiscal effect was passed by Parliament in December 2002. However, Sri Lanka's debt service ratio remains relatively low given the highly concessionary nature of foreign debt. Repatriation of earnings from remittances has consistently accounted for 6-8 per cent of GDP and has been a mainstay of the Sri Lankan economy in the last two decades. In fact, the UNF was having to deal with rising labour unrest from the end of 2003. The incumbent President will not be allowed to run for office under the Constitutional limitations of only two terms in office.

Bibliography l N. Arunatilake, S. Jayasuriya and S. Kelegama, 'The Economic Cost of the War in Sri

Table 2: Exports of Garments of Selected Economies, 1990-2001 US $ Million

Bangladesh China India Indonesia Jordan Mexico Sri Lanka Turkey

1990 643 9,669 2,530 1,646 11 587 638 3,331

1995 1,969 24,049 4,110 3,376 29 2,731 1,758 6,119

1999 3,721 30,078 5,153 3,857 58 7,772 2,287 6,516

2000 4,244 36,071 6,030 4,734 115 8,631 2,812 6,533

Source: WTO, International Trade Statistics (2002).

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2001 5,111 36,650 n.a. 4,531 296 8,011 2,398 6,627

Share in total merchandise exports (%) 1990 2001 38.5 78.3 15.6 13.8 14.1 14.2 6.4 8.0 1.0 12.9 1.4 5.1 33.4 49.8 25.7 21.2

Lanka', Macroeconomic Policy and Planning Series no. 13, (Colombo: Institute of Policy Studies, 2000). l P. Athukorala and S. Rajapatirana, Liberalisation and Industrial Transformation: Sri Lanka in International Perspective, (New Delhi: Oxford University Press, India, 2000). l P. Athukorala and S. Jayasuriya, Macroeconomic Policies, Crises, and Growth in Sri Lanka, 1969-90, (Washington, D.C.: The World Bank, 1991). l A. Cuthbertson and P. Athukorala, 'Sri Lanka' in D. Papageorgiou et. al (eds.), Liberalising Foreign Trade, (Oxford: Basil Blackwell, 1991). l D. Dunham and S. Jayasuriya, 'Liberalisation and Political Decay: Sri Lanka's Journey from Welfare State to a Brutalised Society', Pravada, vol. 7, no. 7., 2001. l D. Dunham and S. Kelegama, 'Does Leadership Matter in the Economic Reform Process?: Liberalisation and Governance in Sri Lanka, 1989-93', World Development, vol. 25, no. 2, 1997. l Government of Sri Lanka, 'Regaining Sri Lanka: Vision and Strategy for Accelerated Development,' Ministry of Policy Development and Implementation, Colombo, 2002. l Government of Sri Lanka, , 'Sri Lanka: A Framework for Poverty Reduction', External Resources Department, Ministry of Policy Development and Implementation, Colombo, 2000. l S. Kelegama, 'Economic Development in Sri Lanka during the 50 Years of Independence: What Went Wrong?', Occasional Paper no. 53, Research and Information System for the Non-Aligned and Other Developing Countries, New Delhi, 1998. l D. Lal and S. Rajapatirana, 1989, Impediments to Trade Liberalisation in Sri Lanka, (U.K., London: Trade Policy Research Centre, 1989).

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Nepal: Low Equilibrium Trap Dr Gunanidhi Sharma

Economic Setting Nepal as a nation state has a history of more than 3000 years. It ranks seventeenth among the old states in the world. Its present shape, however, is a result of the 1816 treaty with British India. The country was ruled by feudal lords and aristocrats till the installation of democracy in 1950. From 1950 till today, democracy could not be stabilised due to the institutionally ambitious and expensive monarchy and the ambiguous role of Nepal's close foreign allies who remained supportive of traditional forces because of the China factor. Of course, Nepal gained in terms of external assistance, but it had to bear a high cost due to political instability which led to inadequate socio-economic transformations unable to realise the twin goals of a modern society i.e. higher growth rate and distributive justice (Sharma, 1998a). The Nepalese society today is economically highly fragmented, unequal and distorted (Sharma, 1998a, 2000b and 2004). This is happening amidst a resource base which is considered strong and viable by any indicators of natural, cultural and human wealth. The capital base remained highly volatile due to rulers' keeping their assets abroad. This led to serious economic effects resulting in low degree of industrialisation and agricultural transformation, massive unemployment, deepening poverty, social discrimination and deprivation, inequality and external dependence. Even after almost 50 years of planned development, the country is unable to overcome structural deficiency, rigidity and development disparity (Shrestha, 1998). Instead, major areas and population of the country are kept outside the market net. The eventual consequence for the economy has been the low resource efficiency and productivity all over the country leading to absolute poverty, income disparity and unemployment as well as low income and saving. This has had a negative effect on investment and growth. The country today is economically in a low equilibrium population trap, which is undermining the smooth transition of the so-called traditional economy to a modern and diversified structure suitable for the competitive world under the WTO framework (World Bank, 2004).

he intent of this paper, therefore, is to present an overview of the Nepalese economy which is joining the WTO and is waiting for prosperity and justice required for dynamic social changes without discrimination, deprivation and cultural fragmentation- the genesis of the current crisis. The paper, for this purpose, is split into various sections. Let us discuss the current state of the economy first.

Institutional Framework and Resource Position The Nepalese economy is determined by forces both at home and abroad. The factors

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at home relate to its geography, history, culture, traditions and their impact on institutional and legal arrangements which may or may not be friendly to economic development. The external factors comprise Nepal's economic and cultural relations with the outside world that have been growing at a faster pace after 1950 (Sharma, 1998c), the year of democratic innovation. Particularly, years like 1955, 1956, 1959 and 1961 are noteworthy. 1955 is the year in which Nepal joined the United Nations. In the year 1956, Nepal initiated the process of modern development by way of introducing planning exercises with the support of foreign assistance. It also established a central bank, the Nepal Rastra Bank, regulating domestic currency as well as foreign exchange in the same year. A national university, the Tribhuvan University, was set up in 1959. The most significant year was 1961 when Nepal became a member of IMF and World Bank, but failed to join GATT, a fact it regretted when India imposed trade sanctions in 1989. The relations with China in the north, however, have not been bitter after 1959 (Sharma 1998c). Steps promoting economic cooperation, helping capital formation and technology transfer, led to the impressive growth of modern sectors, mainly concentrated in urban and suburban areas which are in direct and impressive contact with the international world, leaving rural areas in isolation. It was also felt that the so-called modern steps helped reduce trade dependency on India, which was almost 100 per cent until the early 1960s. Instead, Nepal was efficient in diverting its trade transactions towards other countries. What has emerged today is that Nepal faces equally huge deficits in trade with India and other countries (Sharma 2000a). As a consequence, linkages of income and employment occurred at home. Besides, trade deficits have also resulted in foreign exchange gap, the mitigation of which required either the export of services or the inflow of official as well as private capital. In a situation where Nepal has a weak export base, dependence on foreign capital is substantially high (Sharma, 1998b).

he situation could have been made favourable by raising rates of participation in the development of all kinds of resources all over the country (Sharma, 2004), given the economically viable geographical and cultural heritage and diversities in human and other natural resources. By way of harnessing the stock of this wealth, Nepal could have strengthened its economic position long ago as was done by other nations like Korea, China, and India, who initiated the dynamic process of development in the same period. Indeed, Nepal (see Sharma, 2002) has an area of 147181sq. km. It is split into three zones; namely, hill, mountain and terai. The altitude of the Himalayan range (includes 35 per cent of the land area where 7.3 per cent of the population lives) varies between 4877-8848 meters. This range includes the top mountains like Mount Everest and Kanchan Jangha which are, respectively, the first and third highest in the world. The range covers many such beautiful mountains, which have been the perpetual source of river flows, spring water and snowfalls. The economic viability of this zone is explicitly demonstrated when attraction is provided to tourists and wild life, and impetus for growth is given to agriculture and industry. It is helpful in power generation and

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healthy manpower supply. The hilly region covers 42 per cent land area where 46 per cent of the population resides. Its height ranges between 610-4877 meters. This range includes many valleys, green forests and fertile lands because of which the population density of this zone is high. It is a land scarce region, and, hence, intensive farming practices prevail here. This region is rich in vegetation and cultural diversities and is suitable for cultivation, trekking and tourism. The Terai region is conceded as the most viable region for cultivation and, therefore, is a granary for the country. It is also rich in biodiversity and cultural heritage. Lumbini, the birthplace of Buddha, is a renowned place for tourism. There are a number of national parks in this range. Nepal's human resource position is adequate considering that Nepal gets remittances to the tune of almost one billion dollars (informally estimated).

epal has both natural and human resources. What is required is an efficient harnessing of these resources. Efforts in this direction have been made in the past, through a planned process of development. However, because of policy biases towards macroeconomic adjustment (Sharma, 2004) and the inability of the government to harness and manage resources properly, and also due to the rapidly growing population (at the rate of more than 2.2 per cent annually), the situation has deteriorated. There is rapid depletion of natural resources on which households have depended for centuries for their livelihood. In the absence of appropriate micro-level programs for rehabilitation poverty has increased. There is substantial population pressure on the urban centres, causing many other distortions and anomalies. Nepal also exports poverty historically through emigration. As there is low attraction at home, skilled and efficient manpower is repatriated, making the economy further inefficient. In addition, as a consequence of a defective public policy of aggressive liberalisation and privatisation after 1990, income disparity under the feudal social setup has been further enhanced. All these factors helped fuel the Maoist movement.

ata (see World Bank, 2004; CBS, 2002 and 1997; ICIMOD, 1997; MOF, 2003) reveals that Nepal's population is growing at the rate of 2.2 per cent annually and it has now exceeded 24 million. The growth rate of GDP in 2002, however, remained negative. In 2003, it was positive but 2.3 per cent only. Compared to a population growth rate of 2.2 per cent, the growth of GDP in real per capita term remained only 0.1 per cent. The poverty ratio over decades has been constant at 42 per cent. The ratio of urban population in 2001 was only 13 per cent. The literacy rate is around 55 per cent. While the gross domestic savings to GDP ratio in 2003 was only 11.3 per cent, the ratio for investment for the same year was found to be 26.1 per cent. The savings gap, thus, is almost 15 per cent. This gap is met through foreign assistance in which the loan component is as high as almost 70 per cent. The foreign debt-GDP ratio accounts more than 50 per cent. The debt repayment ratio is around 5 per cent of GDP (Sharma, 1998b). Agriculture is still a dominant sector of the economy, which contributes 40 per cent to the GDP. Given the ratio of population dependant upon agriculture- more than 75 per cent- and the growth performance of it (2.1 per cent in 2003), it is revealed that this large sector of the economy where poverty is concentrated is yet to be modernised.

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The situation would have been neutralised had the industrial sector grown faster. Unfortunately, this sector too grew by 2.3 per cent in 2003. It resulted in 14 per cent of unemployment and 50 per cent of under-employment. Again, inequality measured by GINI coefficient in a decade increased from 0.31 to 0.36 (CBS, 1997) with its aggravating effect on poverty ratio, which has been 42 per cent for decades.

he situation is further worsened by the urban and India-centric policy of the government (Sharma, 1998c and Khatri, 1997) which is market friendly in character. The urban character is demonstrated by per-capita income for rural Nepal, which is half of NRs. 25,000 in Kathmandu (CBS, 1997). It is also evident from the concentration of developmental infrastructure such as electricity, communications, roads and health services in urban areas, which are the established commercial centres (Sharma, 2004). This is further worsened by the historically unjust economic relations based on feudal practices which favour a few of the urban elite, the already privileged, development brokers and those who are wealthy in the rural areas. It is held: '…….Anti-poor, biased distribution of productive assets like land, ownership of enterprises, lending and investment of financial institutions, employment and selfemployment opportunities, urban centric development activities, without proper distribution across regions, etc, on the one hand, and the flat rate of land tax, rebates to bigger investment, collateral based credit system, absence of protection to cottage and small industries employing indigenous labour, etc, on the other, are the defective traditions……..Similarly, urban biased policies in energy, transportation and communication, health and education, banking, finance, insurance and industries have left the resources oi [the] countryside unused, inefficiently used, nonmonetised….The situation is further aggravated by the corruption at the government level whose policies have been too unrealistic in view of the country's reality, as they favour those who have inherited huge property'. (Sharma, 2000b, pp.20-21)

overnment policy is India-centric by virtue of Nepal's 1950 treaty with India, which is committed to national treatment of citizens of each nation. Due to this and also since Nepal lags behind the technologically and institutionally stronger India, shocks in any forms- natural, institutional, economic, technological or market relatedin India are easily transmitted to Nepal, which is unable to bear the burden of an open but unrestricted border and full convertibility of the Indian currency. The compulsion of the 1950 treaty with India is that Nepal cannot remain independent of Indian policy. Nepal must passively adjust its major macroeconomic policies including fiscal, monetary, trade, labour, investment, exchange rates, price, etc, in view of the policy choices in India. This implies that Nepal cannot independently apply any policy and use discretionary power as per local needs. Together with a feudal legacy on all fronts Nepal has failed to achieve the planned objectives of poverty reduction, higher growth rate, satisfactory level of employment, favourable balance of payments, etc. Nepal's chronic problems at this juncture are poverty (42 per cent of the population is below poverty line), under-employment (50 per cent of the labour force) and unemployment (14 per cent of the labour force growing by 300 thousand a year). Of these, the huge

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and fast growing trade deficit (total trade deficit in a year is more than 15 per cent of GDP, which amounts to NRs. 80 billion, and deficit with India alone is NRs. 26 billion) may also be the cause for the other two, as more imports of goods and services imply loss of employment and income with negative repercussions on savings and investment. India's abnormal profit motive reflected in trade negotiations and tariff and non-tariff barriers imposed infrequently upon Nepal is also causing heavy trade deficit and hence, damage to the Nepalese economy.

he eventual effects of these losses are found in the Maoist insurgency, which erupted eight years back in 1996 and continues in violent disruptions. There is a huge loss of social opportunities, life and property. Social opportunities are lost when more development fund in the budget is diverted towards military expenditure with direct negative impact on social expenditure or opportunities. Some ten thousand people have already died and physical infrastructure has been damaged. The loss of property is yet to be estimated. Speculation is that Nepal directly lost more than five billion NRs. worth of public property. The losses in terms of lower growth rates of income and employment, their further aggravating effects on trade deficit, repatriation of human resource and capital abroad and the cycle of downswing in economic activities reflected in declining values of income and employment multipliers have not been estimated so far.

Scope of Economic Modernisation The role of natural, social and cultural endowments in economic development needs not be reiterated. Given the stock of national wealth in Nepal, what is theoretically taken for granted is that resources are not the constraining factors at least in this technology-driven world where the resource efficiency as an essential condition for growth may be sufficiently enhanced through the application of recent know how in all fields of organisation, management, production, supply and marketing. If initial conditions are the necessary condition for accelerating the process of economic growth, the sufficient conditions, undoubtedly, are access to market and expansion of institutional capabilities. The climate for higher growth and development is deteriorating. This weakness is felt even more when the country is becoming market friendly and committed to liberalisation and privatisation. Nepal, at present, is confronted with high aspirations from newly acquired membership of WTO and the primitive state of the commodity and service sectors, which are less exposed to corporate culture.

nstitutionally, culturally and technologically, Nepal, however, lags much behind other countries in competitive supply. The reason is that, on the one hand, it is in the list of least developed countries, as indicated by indexes, including human development, growth rate, poverty, inflow of FDI, etc. On the other hand, its dominant sector of the economy, namely agriculture, is traditional. It is not competent even in manufacturing and service related activities. Studies conclude that Nepalese labour is 20 per cent less efficient than Bangladeshi labour. Their efficiency is not comparable to their Indian counterpart, as witnessed by their replacement by Indians in the Nepalese labour market, whether it is in construction, manufacturing

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or in any other skill-based activities. Even in the unskilled category, Indian labour is hard working. The conclusion is that in order to exploit growing opportunities of entering into the global market and to compete with MNCs at home, Nepal needs structural overhauling. It is getting assurances as well as external assistance from donors, individually and multilaterally, in this direction.

Conclusion Nepal, of course, has a large opportunity for economic development, given economically viable resource endowments. Efforts in this regard have been made in the past four or more decades, beginning in the 1950s. It, however, appears that little is realised in terms of achievements, in sectoral performance or indicators of development affecting quality of life and social transformation. This situation is worsening. This is mainly because of the defective economic policies of the government. While the role of a welfare state and hence the ground for public intervention has been substantially reduced, the tradition bound socio-economic structure based on deep-rooted feudal institutions is benefiting only a few. A majority of the people, therefore, are deprived of social opportunities that could make them economically well off. Again, when economic power backs political power, politics is centred in the hand of already well to do families. This cycle is repeated when economic and political powers re-enforce each other and the rich but resourceful people resist any fundamental change against their compounded interests. The society in Nepal, therefore, is experiencing excessive negative shocks because of which it is losing active dynamism, and hence progress is slow. Besides, the present governance structure is highly centralised keeping many parts of the country alienated from power centres. Subsequently, poverty, discrimination, deprivation and inequality across family and regions are substantiated and sustained. The seeds of crisis are now exploding in the form of the Maoist insurgency which effects the present as well as the future of the Nepalese economy and society. The crisis of governance and economy needs to be tackled with vision. (Dr Gunanidhi Sharma is professor of Economics at Tribhuvan University, Kathmandu and has written extensively on the Nepalese economy).

Bibliography l CBS, Population Census 2001: National Report, (Kathmandu: CBS and UNFPA,

Kathmandu, 2002). l CBS, Nepal Living Standards Survey Report 1996, (Kathmandu: CBS, 1997). l HMG, Constitution of the Kingdom of Nepal-1990, MOLaw/HMG, Kathmandu, 1992. l ICIMOD, Districts of Nepal: Indicators of Development, (Kathmandu: ICIMOD, 1997). l Sridhar K. Khatri, 'Nepal in the International System: the Limits of Power of a Small State',

in Anand Aditya (ed.), The Political Economy of The Small States, (Kathmandu: NEFAS and FES, 1997). l MOF (2003), Economic Survey, MOF, Kathmandu. l Devendra Raj Panday, Nepal's Failed Development: Reflections of the Mission and Maladies, ( Kathmandu: Nepal South Asia Center, 1999). l A. D. Pant (ed.), Planning and the Rural Poor, (Allahabad, Thinkers Library: The Technical Publishing House, 1997). l Gunanidhi Sharma, 'Participatory Democracy in Nepal: Its Economic Dimensions in

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Nepal', paper presented to a seminar on Participatory Democracy in Nepal, organised by Nepal Centre for Contemporary Studies, Kathmandu, 2004. l Gunanidhi Sharma, 'Infrastructure, Service Delivery and Accessibility in Mountains and Hills of Nepal', Economic Journal of Development Issues, vol. 3, no.1, 2002. l Gunanidhi Sharma, 'Dependency and the Question of Sovereignty: The Nepalese Experience', in Khadga K. C. (ed.), The Institutionalization of Democratic Polity in Nepal, ( Pokhara: Department of Political Science/ Sociology P. N. Campus, 2000a). l Gunanidhi Sharma, Nepal: Missing Elements in the Development Thinking, (New Delhi: Nirala Publications, 2000b). l Gunanidhi Sharma, 'The Economy of Nepal: A Macroeconomic Overview', in Pashupati Shumsher, J. B. Rana and Dwarika Nath Dhungel (eds.), Contemporary Nepal, (New Delhi: Vikas Publishing House, 1998a). l Gunanidhi Sharma, 'The Growing Fiscal Imbalance in Nepal: Are We Really Falling Into The Debt Trap', in Gunanidhi Sharma, Dev Raj Dahal and Hari Uprety (eds.), Debt Trap And Its Management In Nepal, (Kathmandu: NEFAS and FES, 1998b). l Gunanidhi Sharma, 'Economic Aspect of Nepalese Foreign Policy', Nepali Political Science and Politics, vol. 6&7, 1998c. l Shrestha, In the Name of Development: A Reflection of Nepal, Educational Enterprises, Kathmandu, 1998. l Hari Upreti, Crisis of Governance, GDS, Kathmandu, 1996. l World Bank, Nepal: Country Assistance Strategy, Nepal Office Kathmandu.

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Caste Politics in India Aditya Nigam

olitics in contemporary India is marked by the 'resurgence' of 'caste politics'. In a sense, this is true. The past two decades have seen a dramatic collapse of the old political formations and parties which had dominated the politics of the Nehruvian era1. Even the movements of that period, right up to the mid-1970s, were largely movements on economic issues and questions of corruption, black-marketing, hoarding and food shortages. Through the decade of the 1980s, there was a gradual erosion of the Nehruvian secular-nationalist imagination, and one of the factors responsible for it was the 're-emergence' of caste in public discourse. The watershed in this respect of course, was the famous 'Mandal Commission' agitation which has become something of a metaphor in contemporary Indian politics. The Commission, which was instituted in 1978 during the Janata Party government, under the stewardship of B.P. Mandal, a socialist leader from a 'backward caste', was given the task of looking into the question of 'backwardness' of certain castes and suggest remedies for its redressal. For about a decade after it submitted its recommendations in 1980, these lay in cold storage after the Congress- under the leadership of Mrs Indira Gandhi (subsequently taken charge of by her son Rajiv)returned to power. It was implemented under extremely contentious circumstances in 1990 under the prime ministership of V.P. Singh. As is well-known, its main recommendations included 27 per cent reservations in public employment for these castes (known in India as the 'Other Backward Classes' or OBCs).

s soon as the government announced its decision to implement the Commission's recommendations, all hell broke loose. There were widespread violent agitations all over North India with sons and daughters of 'respectable families' taking to the streets. It was an unprecedented sight to see these young people, generally cynical about all political activity, taking to road blockades, demonstrations, picketing and such other activities. Some of them even committed self-immolation. Equally interesting was the sight of the usually cynical media backing the agitators to the hilt. New terms like 'mandalisation of politics' entered political discourse. The tone and tenor of the public debate in the media was illuminating for a whole generation of people who had been brought up in modern secular values of the Nehruvian era. This was especially so because they seemed to suggest, almost one-sidedly, that caste was something that we had already left behind and it was the vileness of VP Singh, who wanted to cash in on such retrograde sentiments for purely pragmatic electoral purposes.

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t needs to be borne in mind that this large group of OBCs, who constitute close to 60 per cent of the population, had a negligible presence of about 4 per cent in government employment when these recommendations were implemented. Also worth bearing in mind is the fact that even this small representation in employment was restricted to the lower rungs of government jobs. In other words, the overwhelming majority of public services were monopolised by the small crust of upper castes. In one estimation made by sociologist Satish Deshpande, about 20 per cent of the population controlled about 95 per cent of all jobs. Deshpande has also recently calculated the poverty-caste relationship on the basis of the National Sample Survey Organisation consumption data which confirm the strong relationship between low-caste status and poverty2. However, what is relevant here is not merely the incidence of poverty among different 'backward' caste groups but more importantly, the fact that even among the relatively better-off and educated sections of Dalits (the Untouchable castes) and OBCs, access to public employment, especially at the higher levels, is severely restricted. In other words, as Ram Naresh Kushwaha, an OBC parliamentarian had put it in a parliament debate in 1978, the upper castes have always had informal reservations operating for them in employment; jobs were reserved for them. Manusmriti itself, he had claimed, was nothing other than a reservation of certain jobs for only a certain category of people3.

hat was interesting about the agitation and the highly charged public debate that followed, was that it was entirely conducted from the side of the opponents of the Mandal Commission, in the most immaculate secular and modern language of 'merit' and 'efficiency'. The question was posed as one of dilution, if not the elimination, of merit at the cost of getting in 'unworthy' and 'undeserving' people simply because they happened to belong to certain castes. 'Would you like to be operated upon by a doctor who had become one through reservations?', 'Would you like to fly by an aircraft that was piloted by a reservation pilot?'; such were the kinds of questions that were asked by the anti-Mandalites in these discussions. Not once was the question of upper-caste and brahminical privilege ever articulated as a question of caste-privilege. Even more interesting was the fact that the more sophisticated among the anti-Mandalites were prepared to accept that there was a question of privilege involved here but that should be addressed in terms of 'class': that 'economic' rather than caste criteria should be made the basis of reservations. The question was really one of poverty, they argued, rather than that of caste. While this argument actually erupted in public discourse in the 1990s, it has a fairly long and hallowed history. As evidence shows, it was an argument that had been rehearsed over the decades by the modernist upper-caste leadership. Right from the days of the Kaka Kalelkar Commission, set up in the mid-1950s for the purpose of addressing the same questions that were later taken up by the Mandal Commission, to parliamentary debates and more localised public discussions, this was invariably the argument deployed by the opponents of positive discrimination. As Christohpe Jaffrelot shows, many members of the Kaka Kalelkar commission dissented from the commission's recommendations and what is more, the Gandhian Kaka Kalelkar himself started developing serious doubts even as he submitted his report. Nehru, the

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immaculate modernist as he was, was the one who finally legitimised this position thus: 'If we go in for reservations on communal and caste basis, we swamp the bright and able people and remain second-rate or third-rate'4. On this one question the Nehruvian elite and the Hindu Right were always in complete agreement.

as Nehru a casteist then? Were all those who opposed the Mandal commission in the 1990s, includeding respected scholars of the country, also casteist? This is a question that is being asked today by the Dalitbahujans5. My answer to this question would be that they were not casteists- at least a large section of them were not. They were opposing the 'bringing in' of caste into public discourse on very modernist and secular grounds. They sincerely believed that talking in terms of caste would be a regression into the past that they were so desperately seeking to annihilate. The point that needs to be stressed here is that this time round, caste was the banner of those who had been oppressed by it. The recalcitrance of caste is not a mere repetition of the older story. For in that story, it was the upper castes that held aloft the banner of caste in order to put people 'in their place'. Now things had decisively changed; the upper castes were in constant and vehement denial. Somewhere here in this denial lies hidden the story of Indian modernity. In what follows, I will sketch what I believe are the broad outlines of that story and underline some of the complexities of present-day caste politics.

Modernity and Caste Politics Is there really a 'resurgence' of caste? Is it the case that the question of caste has 'suddenly' become important, implying thereby that till now such was not the case? Is the general perception that was aired in the media during the Mandal Commission controversy- that caste was simply resurrected by VP Singh- a correct perception? The answer is both 'yes' and 'no'. Yes, because there was a sense in which caste had been banished from public discourse and to that extent, its reappearance is a new phenomenon. No, because this unpseakability of caste in public discourse was limited to civil society, that is, to the domain of the secular modern institutions of society. It had not disappeared from society at large. In another realm, away from the watchful gaze of the modern elite, in the domain of what Partha Chatterjee calls political society, caste was a central category that framed the common ways of seeing and being in the world. The secret story of our modernity is of course, lodged in the first realm, that of civil society, for it is here that we see the mutated upper-caste modern Indian Self, in perpetual denial of caste (and to some extent, religion) in all his/her splendour. There is no denying that this modern 'Self' is really and genuinely modern; it wants to excise that shameful thing called caste from its memory. The upper-casteturned-modern Self does not ever want to be reminded of this one aspect of his/her inheritance. It can deal with religion, for that is something that 'we all have' whether we are from the West or from the East. But caste is a blot that has affected the psyche of the mutated modern in ways that can be best expressed in Freudian terms: Caste is the suppressed/repressed, the 'unconscious' as it were, of the modern moral Self (the Superego?). Yet, caste is the hidden principle that gives it the access to all kinds of modern privileges precisely because it functions, as Deshpande suggests, as cultural/symbolic capital.

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o the oppressed castes, especially the lowest among them- the Dalits or the untouchables- this repression of caste appears as a conspiracy of the brahminical castes to deprive them of their voice. It appears to them to displace what is their bitter lived experience to another domain- that of class, for instance. The story that the Dalit wants to narrate can only be told with reference to the history of caste oppression. It is there that the secret of their exclusion and cultural mutilation lies. One of the critical elements of the recalcitrance of caste in contemporary Indian politics is, therefore, the search for a past, a cultural legacy, a history and a sense of Self. The oppressive structure of caste functioned, in relation to the Dalits in particular, through their almost complete exclusion from 'society', such as it was. Here I will not go into stories of daily humiliation and degradation that were and have been part of Dalit life, as these are by now fairly well articulated, documented and discussed. I will briefly refer to one aspect of their exclusion: their exclusion from any kind of access to learning- of whatever kind, including elementary skills of reading and writing. The implications of this forced exclusion are far greater than might appear at first glance. This took away from them any possibility of registering their own history, creating their myths and literature, in other words, deprived them of any sense of their own past. It was, therefore, only with the arrival of colonialism and the opening up of public spaces and institutions to the Dalits, if in a limited fashion (because of upper caste opposition) that these became accessible to them. It is, therefore, only in the early twentieth century, strictly speaking, that the Dalits really found their voice in the sense of being able to record their experience of oppression and talk about it publicly. And it was at this precise moment that the mutated uppercaste modern began to legislate a certain modern universalist language, decrying all attempts to talk of caste oppression as 'casteism', a sign of 'backward consciousness'. There is, therefore, a peculiar ambivalence that marks Dalit politics and discourse today. On the one hand, it invests tremendous faith in modernity because it is really with its onset that possibilities of Dalit emancipation opened up in significant ways; on the other, it exhibits a strong aversion to the dominant, secular-nationalist discourse of modernity in India that it sees as irrevocably 'upper-caste' and the root of the re-institution of upper- caste power over modern institutions.

his ambivalence is visible not only in the field of cultural politics, as it were, but equally in the field of politics as such. In this field, the dynamic is somewhat different but what makes it possible for the Dalit political formations like the Bahujan Samaj Party (BSP), to chart out a course that radically questions the common sense of the secular modern, is its deep distrust of the old nationalist and secular elite. A case in point is the relationship of BSP and much of the Dalit intelligentsia, with the emerging secular political formations, especially in North India. It is well-known that here, in the state of Uttar Pradesh, the Bahujan Samaj Party , has repeatedly gone into an alliance with the main party of the Hindu Right, the Bharatiya Janata Party (BJP). It has formed governments along with the BJP, not only in 1993 and 1997 but also in 2002, in the year of the Gujarat massacres of the Muslims. In this period, when the BJP and its partner organisations of the Sangh family have bared their fascist fangs, leaving nobody in any doubt about their intentions, the BSP entered into an alliance

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and formed a government with the BJP in UP, and its top leaders even campaigned for it in Gujarat during the subsequent elections.

here are two levels of problems involved here; first, the actual relations between different caste groups and second, the logic of electoral politics. On the face of it, it only seems logical that in order to break upper-caste hegemony there should be a larger alliance of the OBCs and Dalits. This had seemed to be a promising line of action to many leaders of the late nineteenth and early twentieth century, like Jyotiba Phule of Maharashtra and Periyar EVR Ramasamy Naicker of what is today Tamil Nadu. Hence they had advocated the idea of a 'Nonbrahmin' unity (Periyar) or a unity of the Shudraatishudras (Phule) in order to challenge the hegemony of the brahminical elite. And up to a point this did have an impact in the first half of the twentieth century, in so far as the brahminical stranglehold over society in these two regions was seriously challenged. Even Kanshi Ram, the chief architect of the present Dalit upsurge in North India, believed that his party should not simply be a Dalit party but a party of 'bahujans' (literally, majority); hence the name, Bahujan Samaj Party. The bahujan samaj, in Kanshi Ram's rendering was to be forged through a broad alliance of the Dalits, the backwards and the minorities, particularly the Muslims. Kanshi Ram also saw clearly that the Dalits alone, comprising not more than about 20 per cent of the electorate in any constituency, could not possibly challenge upper-caste dominance. Hence the aggressive slogan of the period of the rise of the Bahujan Samaj Party (BSP): 'Tilak, tarazu aur talwar/ inko maro joote chaar (thrash the Brahmin, the Bania and the Rajput with shoes)'. That was the astute strategy that managed to make BSP an important force in its early days. The problem, however, began after the first alliance of the Bahujan Samaj Party (BSP) and the Samajwadi Party led by Mulayam Singh Yadav, representing the backward castes, formed its government in UP in 1993. Within a short time it became apparent that as soon as the political pact that was forged between the parties moved towards the countryside, sharp conflicts between the two groups began playing themselves out. It was during the panchayat elections that the conflicts became really serious and many Dalit leaders and intellectuals realised that much of their present conflict in the villages was with the dominant backward castes who had consolidated their hold following the post-independence land reforms. In many states, it was these castes, comprising the erstwhile tenants, who had by now become landowners, who were their main oppressors. And they were not willing to change their attitude towards Dalits in everyday matters, even in the face of the political alliance at the state level. In many areas it was they who had been preventing the Dalits even from casting their votes.

ore importantly, this was the period of the sharp rise of the Hindu Right. Very soon, this threat of the Sangh combine was to become the most important reference point for all future electoral-political alliances. The parties of the OBCs, represented by Mulayam Singh and Laloo Yadav in the two most important northern states of UP and Bihar, positioned themselves firmly against the BJP and the Sangh combine. It is worth remembering that in the period of the build-up to the demolition

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of the Babri Masjid, it was these two leaders who had displayed the most determined opposition to the BJP. Mulayam Singh, in fact, used the entire force of the state machinery during his chief ministership, to prevent the 'kar sevaks' from demolishing the structure of the masjid in November 1990. It was during this same period when L.K. Advani's Rath Yatra entered Bihar, en route to Ayodhya, that Laloo Yadav displayed exemplary courage in arresting Advani, leading to the eventual downfall of the VP Singh government of which Laloo was a part. It was in this context that the anti-communal secular front came into existence and the OBC parties naturally acquired a crucial position within it, given their stance. This is where the problems began as far as the BSP and the newly assertive Dalits were concerned. To throw their lot with the secular front unconditionally was to tie their own hands and throw themselves to the wolves. For the conflict with the OBCs in the countryside was now playing itself out in its most aggressive form. The choice was a difficult one and it was aggravated by another circumstance: the BJP, suave and sophisticated, with the self confidence of the classes who have traditionally wielded power, showed a preparedness to play second fiddle to the BSP in a joint government. This was something that the OBC parties and Mulayam Singh Yadav just could not do- they were novices in the game of power as were the Dalit groups. It is quite possible that if Mulayam had made the magnanimous gesture that the BJP repeatedly made, the BSP might still have opted to remain in the secular alliance.

his is where the deep distrust of the common sense of the secular-nationalist, so ingrained in Dalit politics, comes into play. For the BSP did not really have a moment's hesitation in joining forces with the BJP in forming a government and, in a sense, it was to open the floodgates for later realignments where parties like the Telegu Desam Party and the AIADMK and DMK were to enter into alliances with the BJP, in order to form the government at the Centre. Not only did it form governments with the BJP, the BSP in its last round of power-sharing even bent over backwards to help the BJP leaders in the Babri Masjid demolition case. The point here is not simply that the BSP went into a power-sharing alliance with the BJP, for there are enough precedents of many other parties and groups doing the same in different ways, at different times. Even the Left is not entirely free of that taint. In that sense, political opportunism has always been part and parcel of electoral politics in India. The point here is that it entered into this alliance with a clear argument against the dichotomised mode of politics where the 'communalism versus secularism' conflict was presented by the secular front as simple common sense, as if it subsumed all other conflicts and exhausted all other problems. This manner of privileging the 'secular versus communal' conflict in a manner of speaking, presented the secular front as non-negotiable: you had to enter the front only on the terms already set by it. There was no possibility of any negotiation here, especially with regard to the backward caste parties. It is here that despite its history of attempting to build an anti-upper-caste-Hindu alliance, and despite the fact that it sees its project as irreconcilable with the Hindutva project, the BSP displayed its refusal to take any proposition as given and non-negotiable. The sole concern that guided it was whether its move would help its own project of Dalit liberation. As mentioned earlier, on this

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occasion, the BJP displayed considerable sagacity by agreeing to play a subordinate role in the alliance.

fter the recent collapse of the BSP-BJP alliance for the third time, reports coming in from UP nevertheless, indicate that insofar as the Dalit masses of UP are concerned, the experiments have been fruitful in restoring a sense of dignity among them. On the other hand, the upper caste supporters of the BJP, the Rajputs in particular, feel slighted by the way in which lower orders have taken to insubordination and challenged their position during these successive tenures of the alliance. The experiment, whatever its long-term implications for the secular front, reveals the immense complexity that marks the new era of 'caste politics' in India. (Aditya Nigam is Fellow at the Centre for the Study of Developing Societies (CSDS), New Delhi).

End Notes 1.

2. 3. 4. 5.

The term 'Nehruvian era' is being used here to refer to an era that actually extends far beyond the person of Jawaharlal Nehru himself almost up to the beginning of the 1980s, when the terms of political discourse and practice were still articulated within a secularnationalist framework that was put in place by the Nehruvian leadership. For further details, see Satish Deshpande, Contemporary India: A Sociological View, (Penguin India, 2002). See Lok Sabha Debates, Sixth Series, Vol. XXII, No. I, Lok Sabha Secretariat, Feb. 23, 1978, Pp. 340-3 Christophe Jaffrelot, India's Silent Revolution: The Rise of the low Castes in North Indian Politics, (Delhi: Permanent Black, 2003) See especially the discussion on pages 222-228. The term 'Dalitbahujan' is a recent coinage that refers to the broad spectrum of lower caste groups ranging from the untouchable castes, that is Dalits, to the other lower castes generally referred to as Shudras in the language of the chaturvarna system.

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