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

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