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

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
Table of Contents
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South Asia’s Progress and Challenges
Growth, Poverty and Lagging Regions
Cross-Border Constraints to Growth and Poverty
Reduction
Trade and Regional Cooperation for Development of
South Asia’s Lagging Regions
Managing the Politics of Cooperation in South Asia:
The Way Forward
A.1.South Asia’s progress and challenges
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Between 1960 and 1980, growth in South Asia was sluggish
(only 3.7 percent per year) due to inward looking controloriented policies causing high dependence on low-productivity
agriculture, inefficient and low levels of industrialization, weak
export performance, and inadequate creation of good jobs.
South Asia’s prospects changed in the 1980s as it adopted progrowth 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 Asia’s 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.
A.2. Growth rates in East Asia and
South Asia appear to be converging
Figure 1.1: Real GDP Growth
9.0
8.0
7.0
Percent
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1960-80
1980-90
1990-2000
2000-07
Years
East Asia and Pacific
Sub-Saharan Africa
OECD
South Asia
Middle East and North Africa
Source: World Bank's World Development Indicators.
Notes: Data are averages.
South Asia’s data include the 2007 growth rate, while the rest of the regions do not.
A.3. Poverty in South Asia has declined.
Figure 2. Poverty Reduction in South Asia 1970s-2000s
80
70
60
50
Headcount Index
40
(%)
1970s
30
2000s
20
10
0
Bangladesh
India
Nepal
Countries
Pakistan
Sri Lanka
A.4. But personal and spatial income
inequality has increased
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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.
A.5. Moving forward South Asia faces
three major development challenges
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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?
B.1.Growth, poverty, lagging regions
are inter-linked
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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
B.2. Income per capita in South Asia shows
considerable disparity across countries
Figure 3: South Asia Per Capita Income 2006
Nominal US Dollars
3000
2500
2000
1500
1000
500
0
Countries
Per capita income
Maldives
Chandigarh (India)
Goa (India)
Western (Sri Lanka)
Delhi (India)
Pondicherry (India)
Bhutan
Haryana (India)
Sindh (Pakistan)
Punjab (India)
Maharashtra (India)
Himachal Pradesh (India)
A & N Islands (India)
Gujarat (India)
Kerala (India)
T amil Nadu (India)
Punjab (Pakistan)
North Western (Sri Lanka)
Southern (Sri Lanka)
Central Region (Sri Lanka)
Uva (Sri Lanka)
Karnataka (India)
Sikkim (India)
Andhra Pradesh (India)
Sabaraga-muwa (Sri Lanka)
South Asia
Dhaka (Bangladesh)
T ripura (India)
Eastern Region (Sri Lanka)
Arunachal Pr. (India)
West Bengal (India)
Mizoram (India)
Uttarakhand (India)
Meghalaya (India)
North Central (Sri Lanka)
NWFP (Pakistan)
Nagaland (India)
Northern (Sri Lanka)
J&K (India)
Chittagong (Bangladesh)
Balochistan (Pakistan)
Manipur (India)
Khulna (Bangladesh)
Chattisgarh (India)
Jharkhand (India)
Assam (India)
Rajasthan (India)
Orissa (India)
Barisal (Bangladesh)
Rajshahi (Bangladesh)
Western Region (Nepal)
Sylhet (Bangladesh)
Central Region (Nepal)
Madhya Pradesh (India)
Mid-Western Region
Uttar Pradesh (India)
Eastern Region (Nepal)
Afghanistan
Far-Western Reg. (Nepal)
Bihar (India)
0
500
1,000
1,500
2,000
2,500
B.3. The income differences carry
through at the national level by regions
Punjab (India)
Western (Sri Lanka)
Himachal Pradesh (India)
Haryana (India)
Andhra Pradesh (India)
Kerala (India)
Maldives
Gujarat (India)
Punjab (Pakistan)
Sindh (Pakistan)
Assam (India)
Rajasthan (India)
North Central (Sri Lanka)
T amil Nadu (India)
Karnataka (India)
West Bengal (India)
Bhutan
Central Region (Sri Lanka)
Central Region (Nepal)
NWFP (Pakistan)
Western Region (Nepal)
Southern (Sri Lanka)
North Western (Sri Lanka)
South Asia
Eastern Region (Nepal)
Maharashtra (India)
Uttar Pradesh (India)
Dhaka (Bangladesh)
Sylhet (Bangladesh)
Sabaraga-muwa (Sri Lanka)
Chittagong (Bangladesh)
Chattisgarh (India)
Uttarakhand (India)
Jharkhand (India)
Uva (Sri Lanka)
Madhya Pradesh (India)
Bihar (India)
Far-Western Region (Nepal)
Khulna (Bangladesh)
Mid-Western Region (Nepal)
Orissa (India)
Rajshahi (Bangladesh)
Balochistan (Pakistan)
Barisal (Bangladesh)
0
10
20
30
40
50
60
B.4. Poverty incidence is mostly higher
in lagging regions
B.5. Poverty in the lagging regions is
mostly higher in all countries
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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.
B.6. Income inequality rising in South
Asia
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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
50
45
40
35
30
25
20
15
10
5
0
South Asia
East Asia
Vietnam
Indonesia
China(Urban)
China(Rural)
Sri Lanka
Pakistan
Nepal
India(Urban)
India(Rural)
Bangladesh
Gini Coefficient (%)
Gini
Growth
3
2.5
2
1.5
1
0.5
0
Annual growth rate of Gini (%)
B.7. Gini coefficient (the latest available) and the annual
growth rate of gini (%)
B.8. Annual growth rate of regional inequality and the pure
individual effects for selected South Asian countries
20
18
P ure bet weenindiv
16
Regional
14
12
10
8
6
4
Nepal
Sri Lanka
India (rural)
Pakistan
Bangladesh
0
India (urban)
2
B.9. The tale of “two South Asias”
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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.
B.10. South Asian experience compares
unfavorably with that of developed countries
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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.
C.1. Cross-border constraints to
growth and poverty reduction
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While the problem of lagging regions is gaining public
attention, domestic public policy alone will not help.
Much of South Asia’s lagging regions are either landlocked 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
C.2. Border constraints on lagging regions
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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.
C.3. Most land-locked and border regions
are lagging in per capita income
Map 1: Per Capita Income in South Asia
AFGHANISTAN
PAKISTAN
NEPAL
BANGLADESH
INDIA
SRI LANKA
MALDIVES
Leading Regions
Lagging regions
BHUTAN
C.4. Most landlocked/border regions have higher
poverty rates than regional/national averages
Map 2: Distribution of Poverty in South Asia
AFGHANISTAN
PAKISTAN
NEPAL
BHUTAN
BANGLADESH
INDIA
SRI LANKA
MALDIVES
Leading Regions
Lagging Regions
N/A
C.5. Key socio-economic characteristics
of the border lagging regions
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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 Asia’s 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.
C.6. Apart from being poor, the lagging regions
share a number of common vulnerabilities
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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 Asia’s poor rely heavily on Indus-GangesBrahmaputra water basins that are subject to
frequent water shortages and floods creating serious
challenges for poverty reduction.
D.1.South Asia must address the lagging regions problem in
order to achieve both high and inclusive growth
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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 Asia’s lagging regions are either land-locked
countries or are border districts/states/provinces.
D.2. Trade and cooperation can be instrumental in raising
growth in the lagging regions and lowering vulnerability
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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
D.3. Market integration for higher growth
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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
D.4. South Asia’s international trade has
grown but trade remains heavily restricted
Figure 1.3: Trade Tariff Restrictiveness Index
Figure 1.2: Real Growth in Trade of Goods and Services
14.0
20.0
MFN applied tariffs
12.0
Percent
10.0
8.0
6.0
4.0
15.0
10.0
5.0
2.0
0.0
0.0
1995-99
2000-04
2005-06
2007
Years
East Asia Pacific
Sub-Saharan Africa
OECD
Source: World Bank's World Trade Indicators 2008.
Note: Data for 1995-99, 2000-04, and 2005-06 are averages.
South Asia
Middle East and North Africa
2000-04
East Asia Pacific
Sub-Saharan Africa
OECD
Source: World Bank's World Trade Indicators 2008.
Note: Data for 2000-04, and 2005-06 are averages.
2005-06
Years
2007
South Asia
Middle East and North Africa
D.5. Regional trade is even more heavily
restricted through a host of non-tariff barriers
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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 Asia’s share of intra-regional
trade as a share of total trade was 18 percent. In
2000-07 it fell to only 5 percent.
D.6. Poor trade logistics reduce global
and regional trade in South Asia
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Globally, South Asia performs poorly on trade
logistics. Intra-regionally it is even worse due to
various extra restrictions
D.7. Removal of trade barriers will
promote agglomeration benefits
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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 Asia’s lagging regions.
D.8. Infrastructure is a serious constraint to
South Asia’s growth and lagging regions
South Asia’s 3 infrastructure deficits:
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Service deficit. Power outages and water shortages
regularly occur. Rural roads are impassable in lagging
regions.
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Policy deficit. Distorted pricing, poor sector
governance and accountability, and weak cost
recovery have hampered private sector to invest more
in infrastructure.
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Cooperation deficit. Lack of cooperation between
South Asian countries have constrained the
development of energy resources and raised transport
cost
D.9. Better infrastructure for growth in
the lagging regions
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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
D.10. Regional cooperation for
infrastructure development
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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
D.11. The benefit from energy trade is
especially large
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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
Asia’s hydro-power would be perhaps the highest return
investment.
D.12. South Asia’s tremendous hydropower potential
Map 4: Distribution of Hydro Potential
AFGHANISTAN
PAKISTAN
NEPAL
BHUTAN
BANGLADESH
INDIA
SRI LANKA
MALDIVES
Hydropower supply
Hydropower demand
D.13. Gains from energy trade: Power grid
connectivity in Bangladesh
D.14. Remove restrictions on transport
border crossings
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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
Asia’s lagging regions
Î
D.15.
Î Remove restrictions on transport
border crossings
Uzbekistan
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Tajikistan
Turkmenistan
Caspian
Sea
Kyrgyzstan
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
Afghanistan
tariff, suggesting that transport costs
are a higher barrier to
Iran
intra-regional
trade than tariff
These costs reflect regulatory barriers mainly, but also poor
infrastructure
Unhindered access to regional ports will raisePakistan
income for all
countries
India
Î
Along with removal of transport restrictions, investment in
transport network can change the growth prospects for South
Î
ÎÎ
Asia’s lagging
regions Î
Î
N
W
E
S
Major-Roa ds
Arabian Sea
UAE
Oman
Ro ads
Ra ilway N etwork
Unde r Co nst. Hig hways
Unde r Co nst. Rail
Plan ned Rail Li nk
Î
Ports
Sea
39
D.17. Regional cooperation for reducing
vulnerabilities for South Asia’s poor
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South Asia’s 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
D.18. An example from Bangladesh: For water security and
climate change, cooperative solution only way out for Bangladesh
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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-BrahmaputraMeghna. (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
Bangladesh’s 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
41
poverty reduction in Bangladesh is not possible
42
E.1.Managing the politics of trade and
cooperation in South Asia: key constraints
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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 India’s dominance
E.2. Managing the politics of cooperation
in South Asia: the way forward
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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
E.3. Managing the politics of cooperation
in South Asia: the way forward
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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.