South Asia Regional Study

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Economic Development in South Asia and the Impact of Globalization1 ISHRAT HUSAIN

I would like to address three questions pertaining to the topic assigned to me this morning. The first question is: How have the South Asian economies fared in the last decade and what are their prospects for the future. The second question is: How well they have done compared to other competitor developing regions particularly East Asia? Finally, how have these countries positioned themselves to meet the challenges of globalization and what should they be doing to maximize the benefits of globalization? Economic situation and prospects South Asia has grown at 5.6 percent in the decade of 1990s – faster than for lowincome countries but slower than the East Asian countries. The wide ranging reforms that have been implemented in this region during the last ten years or so have brought about some fundamental changes in the economic landscape and removed some of the major constraints that were retarding the progress of this region. Let me recapitulate them briefly. First, there is now a broad political consensus about the thrust and direction of economic policies in almost all the countries. The defeat of BJP Government in the recent Indian elections should not be construed as an indictment of reforms but a manifestation of the growing impatience of the electorate that these reforms have not been deep, pride and fast enough to touch the lives of the majority of the population. This political consensus has survived many changes of the governments in India since 1991 and the alternating shift of power in Pakistan, Bangladesh and Sri Lanka. Second, reliance on private sector as the main investor, producer and distributor of goods and services has replaced the old notion of the commanding heights model of the economy in which State and State-owned enterprises were the main tools of industrial development. The demise of Licence Raj has given rise to a healthy competitive environment in which market mechanism is used for allocation of resources. This shift has improved the overall efficiency of resource allocation and utilization in South Asia. Third, unilateral trade liberalization has been quite rapid in the 1990s in the whole region. Average tariff rates have declined from 90-100 percent in 1980s to 13-32 percent today. Sri Lanka leads the way followed by Pakistan. India and Bangladesh

Keynote address delivered on the occasion of the Middle East and South Asia Conference of KPMG held at Bahrain in July 11, 2004

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are considered laggards in trade liberalization according to a World Bank study, but are in much better shape than what they were in the 1970s and 1980s. Export promotion has finally been accepted as the new gospel in contrast to the past five decades of obsession with inward looking import substitution and protection of domestic industry. Fourth, domestic financial and capital market reforms have made the financial sector sound and healthy. In Sri Lanka and Pakistan the strides made are quite advanced. India is slowly and gradually opening up to foreign competition and introducing new legislation to improve the performance of the banks and upgrade the quality of assets. Bangladesh has begun the process more recently but is committed to move forward in the same direction. Fifth, macroeconomic stability i.e., low inflation, low domestic interest rates, and stable but realistic exchange rates, has become the hall- mark of these economies. Exchange rate regimes in all the countries have switched from fixed to managed float. Bi-directional movement i.e. both, depreciation or appreciation of domestic currency takes place according to market supply and demand conditions. There is no longer a hang up to defend a particular level of exchange rate and preserving competitiveness of exports and smoothing volatility are the main policy considerations. Large foreign exchange reserves are piling up in all the countries with India’s coverage...
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