Looking for a thaw in S. Asia to face tomorrow's challenges

Huma Fakhar and Jean-Pierre Lehmann, Yale Center for the Study of Globalization, Lahore

South Asia seems to have remained immune to the recent phenomenon of the "borderless world". All movements (goods, people, capital, information), especially between the Pakistani- Indian border, remain restricted though signs of change are appearing.

The notion of improved Indo-Pakistan relations has been proven wrong so often that the premium has been on cynicism and pessimism. But the recently held "Punjab Games," involving some 750 Indian and Pakistani sportsmen from both sides of the divided state of Punjab, cannot but be a heart-warming development. This followed the March 2004 cricket test match between the two nations, who had previously been on the brink of nuclear war.

The renewed sports diplomacy reflects a thaw in the bellicose relations between the two countries. And as formal diplomatic relations also look to be warming, this portends auspicious developments for the entire Indian subcontinent and an enormous boon to the whole central and south Asian region.

As Asia rises in the global firmament and appears poised to play a dominant role in the 21st century, the conventional wisdom is that China will take the lead. From a long view, however, the Indian subcontinent may yet astonish the planet.

A brief look at history reveals its enormous legacy to the world. The birthplace of major civilizations and religions, notably Hinduism and Buddhism, the subcontinent is home to one- third (380 million) of the world's Muslims.

On the economic front, however, until recently, the record has reverberated between disappointing and disastrous. It is ironic that the subcontinent's diaspora should in so many ways be so successful in contrast with the hitherto dismal conditions of their home countries.

Whereas East Asia exported manufactured goods, the Indian subcontinent exported people, often including its best and brightest. This is due in part to its upside-down educational pyramid. While tertiary education, especially in technology and management, is strong, primary and secondary education is weak.

The 2004 United Nations Human Development Report education index measured adult literacy, the combined enrollment ratio for primary, secondary, and tertiary education, and the share of education expenditure to GDP. The lamentable scores of India, Bangladesh, and Pakistan paled in comparison to figures for the East Asian countries. There are more illiterates in India than in the rest of the world combined, and illiteracy among women in the Indian subcontinent surpasses 50 percent.

Thus, while there is ample brain, it outweighs the rest of the body -- the brawn is weak. The brain drain has been acute: At one point, over 80 percent of India's software engineers went to work abroad. The failures in basic education are compounded by widespread poverty; a highly over-regulated, closed, and hence corrupt environment for business; appalling infrastructure; and in Pakistan and Bangladesh (less so in India), the absence of a solid middle-class.

Furthermore, unlike East Asia, which succeeded in transforming itself from one of the world's bloodiest battlefields into one of its most thriving marketplaces, the Indian subcontinent remains divided in many ways. Whereas intra-regional trade in East Asia corresponds to over 50 percent of its total trade, the figure in South Asia is a paltry 2 percent; even considering illegal cross- border smuggling and indirect trade through Dubai, the figure still languishes behind that of the more dynamic part of the Asian continent.

However, the winds of change have been blowing. Beginning in the early/mid-1990s, quite significant reforms have been implemented, several of which have led to Bangladesh, India, and Pakistan becoming more outward-looking. This has resulted in much higher economic growth rates and in a reverse brain drain as many scientists, engineers, and entrepreneurs have returned to take advantage of the more dynamic climate. Tariffs have been greatly reduced, exports have risen, and foreign direct investment has been welcomed. With a current combined population of 1.4 billion -- expected to reach 1.73 billion in 2020 -- the Indian subcontinent's economies must grow.

Though recent trends are encouraging, in order to realize the subcontinent's full potential, three main obstacles must be removed, or at the very least, diminished.

First, at the global level, the Indian subcontinent's export prowess is blunted in industrialized countries' markets by various tariff and non-tariff measures. To cite one example out of many: In the first three months of 2003, according to the U.S. Progressive Policy Institute (PPI), goods imported into the United States from France totaled US$6.846 billion for which tariff revenue of $80 million was collected, while total imports from Bangladesh were $557 million, for which $85 million in tariffs were paid.

Indeed, for all of 2003, duties paid to U.S. customs on imports of apparels from Bangladesh came to $306 million, while in the same year Bangladesh's gross receipt of bilateral U.S. aid was less than $35 million. Ample discrimination against exports from the Indian subcontinent can be cited in many areas, including the movement of labor; the strident Western outcry over outsourcing is a recent variation on a well-known theme.

Second, the bad news on the global front is, unfortunately, more than replicated on the regional front. As noted above, only 2 percent of the region's trade is intra-regional. In 2002, whereas Bangladesh exported $1.90 billion worth of goods to the American market, exports to the Indian market accounted for a miserable $60 million.

India also practices the same double standards. Thus, according to the PPI, since "India's tariff on cotton skirts is 30 percent or 110 rupees, whichever is higher, a $200 cotton skirt from Milan has a 30 percent tariff; but a $2 skirt from Bangladesh has a fee equivalent to a 250 percent tariff." This regional protectionism seriously undermines the region's competitiveness, including in its attractiveness to foreign investors.

Third, on the domestic front, while the reforms have helped, a great deal of work remains. There is a big difference between formulating reforms and implementing them! There is still far too much red tape, far too much corruption, far too much disregard of the rule of law, far too many spokes put in the wheels of entrepreneurs, and still insufficient investment in people.

Fundamentally, however, one can be confident that the current direction will be maintained and that the pace will be accelerated. Indian, Pakistani, and Bangladeshi entrepreneurs are increasingly developing regional strategies. Tata Steel and Bajaj Motors, two key Indian corporate players, are envisaging plants in Pakistan. Pakistanis are investing in India, including in software.

Business leaders are conscious that only by creating an integrated sub-continental market will they really be able to compete with China, including in attracting foreign investments. In the meantime, the international community must do everything in its power to facilitate and encourage -- not impede and discourage -- this development. A prosperous Indian sub-continent will be a great contribution to the 21st century.

Huma Fakhar is a partner of Fakhar Law International, based in Lahore; Jean-Pierre Lehmann is Professor of International Political Economy at IMD, Lausanne, and Founding Director of The Evian Group