Thursday, 9 July 2020

What Can South Asia Learn From East Asia?

Updated: February 16, 2013 2:03 pm

South Asia is in much better shape than it was a generation ago. Alongside East Asia, the sub-continent has enjoyed catch-up growth, narrowing the yawning economic gap with the West. This has accelerated since the global financial crisis.Yet the ‘Asian century’ is overwhelmingly East Asian, not South Asian: the development gap between East and South Asia is huge and widening.

Comparatively, East Asia (Northeast Asia, Greater China plus the ASEAN countries) has a combined population of 2.15 billion; South Asia’s population is 1.66 billion. East Asia’s combined GDP is US$22 trillion at purchasing power parity (PPP); South Asia’s is US$5.5 trillion. East Asia’s per capita GDP is almost US$20,000 (at PPP); in South Asia it is US$3,300.

On human welfare indicators such as poverty rates, life expectancy, literacy, schooling and nutrition, most East Asian countries are well ahead of South Asia. East Asia’s import tariffs are less than half what they are in South Asia. In the World Bank’s Doing Business index, all the top Asian performers are in East Asia. The best South Asian performer is Sri Lanka (in 81st place), with India bringing up the rear (in 132nd place).

East Asia is also a much more integrated economic space. Intra-regional trade is over 50 per cent of total trade and 30 per cent of regional GDP. In South Asia, intra-regional trade is 4 per cent of total trade and 2 per cent of regional GDP.

 

What success factors from East Asia can South Asia emulate to boost growth and broad-based prosperity?

Two features of the ‘East Asian miracle’ stand out.

First, East Asian countries got the basics right: prudent monetary and fiscal policies, competitive exchange rates, low domestic distortions (such as price controls and wasteful subsidies), flexible labour markets, openness to international trade, and investments in education and infrastructure. These economy-wide policies provided propitious environments for rapid catch-up growth. In contrast, ‘industrial policies’ subsidies, restrictions on imports and foreign investment, and other measures to promote targeted sectors were much less successful. There is scant hard evidence that they worked. And there continue to be numerous industrial policy failures, as recent experience from Southeast Asia and China shows.

Second, East Asia emerged as the global hub for manufacturing, particularly in information technology products. Production is fragmented across the region, but knitted together in vertically integrated supply chains to serve global markets. This phenomenon has been critical to East Asia’s industrialisation, growth and global integration.

Now turn to South Asia. India accounts for 70 per cent of South Asia’s population and 80 per cent of its GDP. Over the last twenty years, market reforms have lifted the growth rate to an annual 8 per cent from 200411. This has delivered significant poverty reduction.

But growth has not benefited the poor nearly as much as in East Asia. That is because India has much bigger reform gaps; it has not gotten the basics right. Public finances are shaky due to persistent budget deficits. Internal and external trade barriers, price controls and hugely wasteful subsidies throttle agriculture. Most services sectors are weighed down by myriad restrictions. Unlike China, India has not become an FDI-driven export powerhouse in labour-intensive manufacturing sectors such as toys, garments and IT products. Indian infrastructure lags behind East Asia. The Indian state is also much more corrupt and dysfunctional than most of its East Asian counterparts.

Pakistan, Nepal and Bangladesh have even worse problems with politics, economic policies and institutions. Sri Lanka has long been the wealthiest country in South Asia (putting the Maldives and Bhutan to one side). But since the 1970s, it has had chronic ethnic strife, progressively weaker institutions and a beleaguered civil society. Politics has become more corrupt and violent, and power has become extremely centralised and arbitrary.

Finally, South Asia, unlike East Asia, has not integrated into global supply chains, apart from Sri Lanka and Bangladesh in garments, and India in a few other niche manufacturing and services sectors. Intra-regional trade barriers are much higher than they are in East Asia, and cross-border infrastructure much worse.

So what can South Asia learn from East Asia?

First, get the policy basics right for catch-up growth. Second, avoid a ‘picking winners’ industrial policy.

Third, liberalise markets bottom-up rather than top-down. Don’t rely on international and regional organisations and their grand designs to do the job. Rather market reforms must first come from national capitals, sub-national regions and cities. Then they will spread by competitive emulation. That is how East Asia opened up trade and foreign investment, enabling the emergence and expansion of manufacturing supply chains.

Fourth, improve governance and the rule of law. Easier said than done, of course.

Fifth, expand labour-intensive manufacturing. Attracting FDI and developing export capability are critical. This is potentially a big engine of growth and employment for the poor, and the surest way of linking up with East Asian and global supply chains. But it will not happen without further reforms, notably labour market deregulation.

Sixth, boost regional economic integration by reducing cross-border tariffs and non-tariff barriers and by improving cross-border infrastructure. Unilateral, bottom-up liberalisation will be more important than bilateral and regional free trade agreements, though the latter can be complementary.

This is a shopping list for South Asia based on East Asian experience. Political obstacles loom large. Given India’s immense importance in the region, it is vital for it to take the lead and to lead by example. (East Asia Forum)

 By Razeen Sally

(The author is Visiting Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.)

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