Strategy of development

The economies of South Asia have many more features in common than is generally recognised, but unfortunately for the wrong reasons.

THE countries of South Asia have strange relationships with one another. There is, of course, the uneasy and periodically violent interaction between India and Pakistan. There is the more complex attitude of all the smaller countries vis-a-vis India, along with the Indian government's own implicit perception of itself as the sub-regional power and Big Brother. There are the tentative and inchoate attempts of the various smaller countries to forge relationships with one another, overcoming histories of mistrust or alienation.

In all this, one widespread perception in the region is that each country is very different from all the others, not only in terms of politics, history, culture and society, but also in economic structure and trajectory. But this perception is actually false, as even the most cursory investigation into economic processes in the region will reveal. It turns out that the very disparate countries of the region, which differ in size, resource endowment, particular social and political configurations, and patterns of constraints, nevertheless, have a remarkable commonality of economic experience.

Thus, all of these economies share certain structural characteristics. These include: the presence of a high degree of underemployment; a strong dualism between organised and unorganised sectors, especially in manufacturing, which sometimes (but not always) translates into the dualism between large-scale and small-scale industries; the continuing significance of agriculture as a major employer; the emergence of services as the largest employers, often as a refuge sector; the involvement of by far the larger share of the work force in what is essentially low productivity employment.

But in addition to these, what is more noteworthy is the apparent synchronicity of policies and processes across the region, despite highly differing social and political pressures. All the economies of the region had import-substituting industrialisation strategies for the first few decades after Independence, with the attendant development of some industry and associated dualism in the economy, as well as regulation of much economic activity.

From the 1980s onwards, all of them moved, to varying degrees, to a strategy of development based on export-orientation, liberalisation and privatisation based on the marketist neo-liberal economic paradigm. The process could be said to have started in South Asia with the government of President J.R. Jayawardene in Sri Lanka moving towards liberalisation and dismantling the earlier universal food security system, in the late 1970s and early 1980s.

Subsequently, and more strongly in the early 1990s, all the governments in the region (barring that of Nepal, which had very a different situation) went through fairly comprehensive policies of internal liberalisation, reduction of direct state responsibility for a range of goods and services and privatisation. While we in India may perceive specificity in our own reforms, there was still a remarkable degree of similarity even in the design and pattern of these neo-liberal economic strategies across the region.

By the turn of the 21st century, most of the important economies in South Asia had undergone the following changes:

* Very substantial reduction in direct state control in terms of administered prices, regulation of economic activity;

* Privatisation of state assets, often in controversial circumstances;

* Rationalisation (usually also a euphemism for reduction) of direct and indirect tax rates, which became associated with declining tax-GDP (gross domestic product) ratios;

* Attempts (typically unsuccessful) to reduce fiscal deficits which usually involved cutting back on public productive investment as well as certain types of social expenditure, reducing subsidies to farmers and increasing user charges for public services and utilities;

* Trade liberalisation, involving shifts from quantitative restrictions to tariffs and typically sharp reductions in the average rate of tariff protection;

* Financial liberalisation involving reductions in directed credit, freeing of interest rate ceilings and other measures which raised the cost of borrowing, including for the government;

* Moving to market-determined exchange rates and liberalisation of current account transactions;

* Allowing some degree of capital account liberalisation, including easing rules for foreign direct investment (FDI), allowing non-residents to hold domestic financial assets and providing easier access to foreign commercial borrowing by domestic firms.

THIS commonality of policy experience meant in turn that outcomes were also quite similar, despite the very different initial conditions in the different economies.

First, the evidence points to increasing inequalities of income in all the economies of the region. These growing inequalities are evident in terms of differences between rural and urban residents; between households in various size-classes of expenditure; between sub-regions within countries. The widening of income gaps has also in some cases been associated with increased social and political tensions in the region, which may be expressed not so much in direct demands for redress of income imbalances, but in terms of other ethnic, social, cultural or regional demands.

Second, across all the countries in the region there has been deceleration of employment generation, compared to previous periods. This has occurred despite a slight improvement, or at least the same trend level, of growth in aggregate economic activity. In all the countries in South Asia, employment generation has not kept pace with the increase in population, and in several countries (such as India and Pakistan, for example) this has expressed itself in not only in higher rates of unemployment and underemployment, but also in declining labour force participation, which is not fully explained by increased involvement in education.

Third, in most of the countries in the region, there has been stagnation or increase in levels of poverty as defined by the head count ratio. India is the only country where the data are ambiguous on this matter, but even here, plausible estimates suggest that while poverty has declined somewhat over this period, the rate of decline has reduced compared to the earlier periods. Such evidence on poverty across the region is broadly in conformity with the evidence on widening inequality and decelerating employment that has already been mentioned.

Fourth, the relative decline of manufacturing, especially in the small-scale sector, and the stagnation or decline of manufacturing employment, is marked across the region, with the exception of Sri Lanka. In different countries of the region, agriculture and /or services appear to have become residual refuge sectors for workers who cannot find productive employment in industry; in India, however, even agricultural employment has declined. Across the region, there appears to be relatively little link between rates of aggregate economic growth and total employment generation in the recent past.

Fifth, in all countries of the region the quality of employment appears to have deteriorated, with an increase in casual and part-time work, as well as greater fragility of contracts and indications that day labourers find fewer days of work. Real wage rates have typically stagnated in most countries; certainly wage shares of income have declined in all countries.

These patterns of growth and employment observed in the different economies of South Asia since the early 1990s call into question the arguments advanced by the advocates of neo-liberal reform, that there is a direct link between such reform and economic growth. Such a link tends to be based on the premises that both internal deregulation and external liberalisation spur private investment, that curbing public investment is beneficial for aggregate growth because otherwise it tends to "crowd out" private investment, that privatisation delivers assets to those who are likely to make socially more desirable use of them, and that private agents acting on their own will deliver both more efficient and more dynamic outcomes.

This optimistic perception ignores the widespread evidence of market failure, at both microeconomic and macroeconomic levels, as well as the strong evidence of close positive links between public and private investment. There are obvious reasons why such an argument, therefore, would not hold over either short-run or longer-run time horizons, especially in developing economies such as those in South Asia.

Given the unequal asset and income distribution that exist and the consequent limited nature of the home market, private investment would come up against a demand constraint fairly rapidly. This would be aggravated when the type of private investment that occurs does not generate that much employment, as is likely when the investment is in sectors catering to richer consumers with production involving high import content or more capital-intensive technology.

PUBLIC investment in developing countries tends to have strong positive linkages with private investment, not only because of the standard Keynesian mechanism, but because it also operates to ease infrastructure and other supply constraints, making private production easier and cheaper. Therefore, a strategy based on reducing public investment and hoping for deregulated private investment to fill the gap could well be expected to generate lower aggregate investment and growth trajectories than one which allows for an important role for public investment.

This argument is actually borne out by the experience of almost all the countries of South Asia that have been briefly discussed above. As we have seen, by the turn of the decade, governments in the region had already achieved major liberalisation and deregulation in many important areas of the economy.

Thus, internal and external trade were almost completely liberalised in all the countries of the region by 2001. Domestic deregulation - especially for large capital - was extensive and provided much greater freedom to private investors in general. Attempts to control the fiscal deficit in order to prevent "crowding out" of private investment meant cuts in government productive expenditure and substantial reduction in the "primary deficits" (that is, net of interest payments). Many cases of privatisation of public assets were pushed through even at rock bottom prices.

Despite all this, if growth still tended to slacken, the problem obviously lay to a substantial extent with the neo-liberal reform process itself. And this was manifested in the fact that in aggregate terms the reform process did not generate either higher rates of investment in the aggregate or increases in the productivity of such investment.

ALL the governments in the region now recognise that employment generation has been a major failure of the reform process so far. In fact, increasing employment generation is now the explicit concern in most of recent planning and policy documents that have been published in the region.

It is strange, however, that while the explicit goal has changed from growth in itself to employment generation, the strategies that are supposed to achieve this essentially involve further doses of neo-liberal marketist reform, rather than policies that would directly affect employment. Thus, most of the policy statements refer to further privatisation, further deregulation of domestic economic activity, further financial liberalisation and external capital account liberalisation, and further restrictions on fiscal policies.

These are precisely the set of policies that, as observed already, have been associated with deceleration of employment in the past decade. If employment generation is to be the focus of the new policy thrust in the region, then it would actually require a rethinking of these policies, towards more active state intervention in terms of supporting employment-intensive activities through a range of trade, fiscal and financial measures.

Without such active involvement, aggregate employment in the region is likely to continue to stagnate, and may even deteriorate with further doses of neo-liberal reform. And then the economies of South Asia may continue to be similar, for all the wrong reasons.