Trade and Regional Cooperation for Growth and Poverty Reduction in South Asia

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Trade and Regional Cooperation for Growth and
Poverty Reduction in South Asia

• Presentation to the IGC Trade Program, School of
  International and Public Affairs, Columbia
  University, New York, March 25, 2010.
• Sadiq Ahmed
• Policy Research Institute of Bangladesh

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Table of Contents

• South Asias Progress and Challenges
• Growth, Poverty and Lagging Regions
• Cross-Border Constraints to Growth and Poverty
  Reduction
• Trade and Regional Cooperation for Development of
  South Asias Lagging Regions
• Managing the Politics of Cooperation in South
  Asia The Way Forward

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A.1.South Asias progress and challenges

• Between 1960 and 1980, growth in South Asia was
  sluggish (only 3.7 percent per year) due to
  inward looking control-oriented policies causing
  high dependence on low-productivity agriculture,
  inefficient and low levels of industrialization,
  weak export performance, and inadequate creation
  of good jobs.
• South Asias prospects changed in the 1980s as it
  adopted pro-growth policies by opening up markets
  to international competition, replacing public
  sector with the private sector as the engine of
  growth, and improving macroeconomic management.
• As a result, South Asias growth rate climbed to
  around 5.7 percent during 1980-2000, which
  further accelerated to 6.5 percent during
  2000-2009.
• Poverty has come down sharply in all countries
  and social indicators have improved.

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A.2. Growth rates in East Asia and South Asia
appear to be converging
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A.3. Poverty in South Asia has declined.
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A.4. But personal and spatial income inequality
has increased

• Despite strong growth and poverty reduction, two
  negative developments have emerged
• First, income inequality has increased.
• Second, there is growing income imbalance in
  regions within countries and among the South
  Asian countries leading to the lagging regions
  problem.

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A.5. Moving forward South Asia faces three major
development challenges

• How can South Asia grow even faster than in the
  recent past in order to reduce poverty at a
  faster pace ?
• How can the gap between leading and lagging
  regions be reduced?
• How can personal income inequality be lowered?

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B.1.Growth, poverty, lagging regions are
inter-linked

• With few exceptions lagging regions exhibit
  higher than average poverty incidence and lower
  than average per capita incomes
• Concentration of poverty in the lagging regions
  is largely a reflection of slower growth
• Inequality is a more complex challenge, although
  growing spatial inequality might have contributed
  to personal income inequality

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B.2. Income per capita in South Asia shows
considerable disparity across countries
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B.3. The income differences carry through at the
national level by regions
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B.4. Poverty incidence is mostly higher in
lagging regions
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B.5. Poverty in the lagging regions is mostly
higher in all countries

• Nearly half a billion South Asians live in the
  lagging regions.
• In India, nearly 60 percent of the poor in live
  in the lagging states. Every seventh poor Indian
  lives in Bihar (the state with the lowest per
  capita income).
• In Sri Lanka, poverty rates are lower in western
  part (leading regions) as compared to the rest of
  the country.
• In Nepal, poverty incidence is higher in western
  part (lagging region).
• In Pakistan, Balochistan and NWFP (the low income
  provinces) have higher poverty rates than Sindh
  and Punjab.
• In Bangladesh, the Northern part has lower income
  and higher poverty than the Central and Southern
  parts.

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B.6. Income inequality rising in South Asia

• South Asian experience shows growing personal
  income inequality.
• Inequality is also rising within regions
• For most countries growth in inequality across
  leading and lagging regions is rising faster than
  growth in inequality across individuals

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B.7. Gini coefficient (the latest available) and
the annual growth rate of gini ()
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B.8. Annual growth rate of regional inequality
and the pure individual effects for selected
South Asian countries
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B.9. The tale of two South Asias

• Leading regions characterized by rapid GDP
  growth, urbanization, and integration with the
  global economy.
• Lagging regions rural, rely on low value
  agricultural and informal activities, and are not
  integrated with the national, regional, and
  global market.

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B.10. South Asian experience compares unfavorably
with that of developed countries

• Income gap between the leading and lagging
  regions in South Asia is larger compared to the
  spatial disparities in developed countries.
• For example, in India, GDP per head in the
  richest state (Haryana) is 5 times greater than
  the poorest state (Bihar). In US, the difference
  is 2.5 times and in Japan only 2 times.
• There is evidence of strong convergence among
  regions in US, Japan and EU.

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C.1. Cross-border constraints to growth and
poverty reduction

• While the problem of lagging regions is gaining
  public attention, domestic public policy alone
  will not help.
• Much of South Asias lagging regions are either
  land-locked countries (Afghanistan, Nepal) or are
  border districts/states/provinces of the three
  larger countries of Bangladesh, India and
  Pakistan.
• So, in addition to efforts to increase investment
  and improve governance, public policy must pay
  attention to the cross-border aspects of the
  lagging regions problem

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C.2. Border constraints on lagging regions

• The landlocked countries of both Afghanistan and
  Nepal are among the lowest per capita income
  group in region.
• Out of 14 states of India that have borders with
  neighbors, 12 have per capita income levels that
  are at or below national average.
• In Pakistan, per capita income is lower than
  average in the border provinces of North-West
  Frontier, Balochistan, and rural Sindh.
• In Bangladesh, the border districts tend to have
  lower than average per capita income than the
  national average.
• Most of the lagging regions in income terms are
  also lagging in terms of having higher than
  average incidence of poverty and/or poorer human
  development indicators.

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C.3. Most land-locked and border regions are
lagging in per capita income
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C.4. Most landlocked/border regions have higher
poverty rates than regional/national averages
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C.5. Key socio-economic characteristics of the
border lagging regions

• These lagging land-locked/border
  countries/states/provinces/
• districts have an estimated 400 million
  people of which an estimated 200 million people
  are poor (reference year of 2005). This is about
  50 percent of South Asias estimated total number
  of poor for the year 2005.
• Much of the population is rural (90 percent) and
  most are engaged in low-productivity agriculture.
• The human development indicators tend to be below
  the comparable national average and many
  indicators are lower than the average in South
  Asia.
• Infrastructure is on average poorer than rest of
  the respective countries and poorer than the
  average for South Asia
• The border regions on average tend to be more
  vulnerable to water shortages and flooding
  problems than other parts.

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C.6. Apart from being poor, the lagging regions
share a number of common vulnerabilities

• First and foremost is the vulnerability to
  natural disasters. The loss of life and income is
  tremendous and it is the poor who suffer most.
• A related vulnerability is the water constraint
  on irrigation and transport.
• South Asias poor rely heavily on
  Indus-Ganges-Brahmaputra water basins that are
  subject to frequent water shortages and floods
  creating serious challenges for poverty
  reduction.

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D.1.South Asia must address the lagging regions
problem in order to achieve both high and
inclusive growth

• South Asia has made progress, but growing forward
  the challenge is complicated by the fact that
  growth is concentrated in leading regions while
  poverty is concentrated in lagging regions
• To achieve higher and more inclusive growth,
  public policy must concentrate on raising growth
  and human development in the lagging regions
• Rising inequality between regions suggest that
  higher income growth in lagging regions might
  help reduce personal income inequality.
• The focus of public policy also needs to
  recognize that much of South Asias lagging
  regions are either land-locked countries or are
  border districts/states/provinces.

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D.2. Trade and cooperation can be instrumental in
raising growth in the lagging regions and
lowering vulnerability

• Trade and regional cooperation can help
  accelerate growth and reduce poverty by
  supporting market integration for goods and
  factor services
• Better physical connectivity and trade in energy
  will lower transaction costs and ease the energy
  constraint, thereby promoting private investment
• Water cooperation will raise farm productivity
  and reduce vulnerability of the lagging regions

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D.3. Market integration for higher growth

• The extent to which economic agents take
  advantage of market is impacted positively by
  density, but negatively by distance and division
• By reducing distance and division, market
  integration both within and between countries,
  brings economic agents in lagging regions closer
  to the density of leading regions, promoting
  positive spillover effects which enhance spatial
  multipliers.
• South Asia has significant room to benefit from
  better market integration globally, across
  countries within South Asia, and within countries

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D.4. South Asias international trade has grown
but trade remains heavily restricted
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D.5. Regional trade is even more heavily
restricted through a host of non-tariff barriers

• Within South Asia market integration is the
  lowest in the world regional trade is less than
  2 percent of GDP in South Asia as compared with
  40 percent for East Asia
• Border barriers to trade and services have mostly
  disappeared in the rest of the world
• In contrast, divisions across countries have
  increased dramatically in South Asia
• Thus, in 1948 South Asias share of
  intra-regional trade as a share of total trade
  was 18 percent. In 2000-07 it fell to only 5
  percent.

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D.6. Poor trade logistics reduce global and
regional trade in South Asia

• Globally, South Asia performs poorly on trade
  logistics. Intra-regionally it is even worse due
  to various extra restrictions

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D.7. Removal of trade barriers will promote
agglomeration benefits

• Yet, geographical configurations of South Asia
  contain huge agglomeration potential to propel
  growth
• East Asia is an example of a region with a
  high-level of intra-regional trade and
  intra-industry trade that enabled firms to
  internalize externalities arising from
  agglomeration.
• The seamless interaction of improved trade,
  better connectivity and converging institutions
  can accelerate growth in South Asias lagging
  regions.

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D.8. Infrastructure is a serious constraint to
South Asias growth and lagging regions

• South Asias 3 infrastructure deficits
• Service deficit. Power outages and water
  shortages regularly occur. Rural roads are
  impassable in lagging regions.
• Policy deficit. Distorted pricing, poor sector
  governance and accountability, and weak cost
  recovery have hampered private sector to invest
  more in infrastructure.
• Cooperation deficit. Lack of cooperation between
  South Asian countries have constrained the
  development of energy resources and raised
  transport cost

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D.9. Better infrastructure for growth in the
lagging regions

• Improved infrastructure that enhances
  connectivity and contributes to market
  integration is the best solution to promoting
  growth as well as addressing the rising
  inequality between regions
• South Asian growth relied more heavily on
  services sector relative to manufacturing,
  thereby constraining good job creation.
• Future growth must rely more aggressively on
  manufacturing to create more and better jobs
• Better infrastructure and agglomeration prospects
  of regional cooperation will benefit the
  manufacturing sector

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D.10. Regional cooperation for infrastructure
development

• Regional cooperation can promote infrastructure
  in three priority areas telecoms and internet
  energy and transport
• A regional telecom network and a high-bandwith,
  high speed internet-based network could help
  improve education, health and innovation
• It would also facilitate better flow of ideas,
  technology, investments, goods and services
• More broadly, this would strengthen the
  competitiveness of South Asia in the services
  export sector

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D.11. The benefit from energy trade is especially
large

• Afghanistan and Nepal are sitting on water
  resources that could potentially generate some
  24,000 MW of electricity from Afghanistan and
  83,000 MW from Nepal
• Exploitation of this potential can unlock the
  energy constraints in India, Bangladesh,
  Pakistan.
• Afghanistan and Nepal, the two poorest South
  Asian countries will benefit tremendously as well
  from higher income from hydro-power
• Yet less than 1 percent is actually used due to
  lack of cooperation. Indeed without borders
  development of South Asias hydro-power would be
  perhaps the highest return investment.

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D.12. South Asias tremendous hydro-power
potential
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D.13. Gains from energy trade Power grid
connectivity in Bangladesh
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D.14. Remove restrictions on transport border
crossings

• Cross-border transport restrictions are a huge
  constraint on trade and investment in South Asia
• In most cases ad-valorem transport costs exceed
  the applied tariff, suggesting that transport
  costs are a higher barrier to intra-regional
  trade than tariff
• These costs reflect regulatory barriers mainly,
  but also poor infrastructure
• Unhindered access to regional ports will raise
  income for all countries
• Along with removal of transport restrictions,
  investment in transport network can change the
  growth prospects for South Asias lagging regions

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D.15. Remove restrictions on transport border
crossings

• Cross-border transport restrictions are a huge
  constraint on trade and investment in South Asia
• In most cases ad-valorem transport costs exceed
  the applied tariff, suggesting that transport
  costs are a higher barrier to intra-regional
  trade than tariff
• These costs reflect regulatory barriers mainly,
  but also poor infrastructure
• Unhindered access to regional ports will raise
  income for all countries
• Along with removal of transport restrictions,
  investment in transport network can change the
  growth prospects for South Asias lagging regions

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D.17. Regional cooperation for reducing
vulnerabilities for South Asias poor

• South Asias poor would probably gain most from
  regional cooperation in water and climate change.
  The Indus Basin Agreement between India and
  Pakistan is an example.
• Cross-border cooperation on water between India,
  Bangladesh, and Nepal offers the only long-term
  solution to flood control and water shortages in
  Bihar, UP and Bangladesh
• A cooperative solution between Afghanistan and
  Pakistan on the sharing of the Kabul river hold
  tremendous potential for resolving water
  shortages in both countries

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D.18. An example from Bangladesh For water
security and climate change, cooperative solution
only way out for Bangladesh

• The location of Bangladesh makes it especially
  vulnerable to climate change and natural
  disasters as it lies at the bottom end of the
  flow of the three mighty rivers
  Ganges-Brahmaputra-Meghna. (See Map)
• Importantly, all three rivers, especially the
  Ganges and the Brahmaputra, flow thru upstream
  India. Other upstream countries are China and
  Bhutan (Brahmaputra) and Nepal (Ganges)
• It is obvious from geography that the only viable
  solution to Bangladeshs water problems and
  vulnerability to climate change is through a
  cooperative solution with upstream neighbors
  (India, Nepal, Bhutan and China)
• Arguably, without water cooperation long-term
  solution to poverty reduction in Bangladesh is
  not possible

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E.1.Managing the politics of trade and
cooperation in South Asia key constraints

• The gains from cooperation are obvious. What are
  the key constraints?
• First and foremost is the prevalence of a number
  of regional disputes (Kashmir problem, Talibans
  issue)
• Second is the lack of good information and
  analysis in the public domain about the benefits
  of cooperation
• Third is the internal political interests in
  countries that are divided along nationalistic,
  religious and ethnic lines that substantially
  complicate regional cooperation agenda
• Finally, the bilateral approach to regional
  cooperation has raised suspicions in smaller
  countries of Indias dominance

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E.2. Managing the politics of cooperation in
South Asia the way forward

• International experience shows that political
  constraints and historical conflicts need not be
  permanent barriers to cooperation (EU)
• Presence of a dominant country should also not be
  a problem (China and ASEAN)
• Fortunately the environment for cooperation is
  improving in South Asia as economic progress has
  created better political space and a greater
  realization the cooperation is necessary for
  progress in the lagging regions and for
  addressing the infrastructure constraints
• The recent initiatives taken by Bangladesh and
  India to remove trade and transit barriers is a
  huge step forward and could show the way for the
  future

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E.3. Managing the politics of cooperation in
South Asia the way forward

• The next step is to identify concrete bankable
  projects where multi-country cooperation would
  yield tangible benefits for citizens.
• The immediate priorities are trade facilitation
  regional transport energy trade and water
  cooperation
• Cross-border transactions must be depoliticized
  and pursued on a commercial basis
• Enabling national and international private
  investors to participate in these transactions
  hold the most promise of success than bilateral
  political deals
• International financial institutions can also
  play a useful role by bringing global good
  practices, by providing technical assistance to
  smaller countries and by mobilizing external
  financing.