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Asian economic integration: a perspective on South Asia
Journal of Asian Economics 13 (2003) 767±785
Asian economic integration: a perspective on South Asia$ Saleem M. Khan*, Zahira S. Khan Department of Economics, Bloomsburg University, 400 East Second Street, Bloomsburg, PA 17815-1301, USA Received 29 May 2002; received in revised form 23 August 2002; accepted 3 September 2002
Abstract This paper argues in favor of open regionalism and continent-based integration in Asia. These are the effective instruments of outward-oriented development. The enlargement of trading blocs into continent-based integration also serves as a countervailing power to stem the excesses of economic globalism. The case made in the paper shows the need for institutional changes for promoting economic development. Institutional changes along with open regionalism are essential to enhancing outward-oriented development in South Asia. Respectable progress has been made in these areas across the continents in general, and in Asia in particular (ASEAN, SAARC, APEC). Efforts on these initiatives must be redoubled as we start the 21st century. # 2002 Elsevier Science Inc. All rights reserved. Keywords: Open regionalism; Continent-based integration; Outward-oriented development; Economic regionalism
Global trends in open regionalism indicate a gradual movement towards continent-based integration. Growing interest in open regionalism in recent years is to promote outwardoriented development, and to harmonize domestic economic policies with the forces of economic globalism such as liberalization, privatization, deregulation.1 It is not surprising that many sub-regional trading blocs are currently adopting strategies of open regionalism and entering into continent-based integration. Strategic instruments of open regionalism, i.e., deepening and widening, speci®cally focus on building a sound trading structure and to guide merging of regional blocs into a continent-based trading body. The enlargement of the $
24th ACAES International Conference, Beijing, China, May 27±29, 2002. Corresponding author. Tel.: 1-570-389-4681; fax: 1-570-389-4338. E-mail address: [email protected] (S.M. Khan). *
1049-0078/02/$ ± see front matter # 2002 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 9 - 0 0 7 8 ( 0 2 ) 0 0 1 8 4 - 7
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European Union (EU), closer relationship between Association of South East Asian Nations (ASEAN) and Asian Paci®c Economic Cooperation (APEC), launching of the Free Trade Area of the Americas (FTAA), proposed establishment of African Union (AU), and revitalization of other regional arrangements across the world highlight this trend. The framework of continent-based integration when operational, leading development economists argue, will reinvigorate powerful propensities of trade and investment, and reinforce outward-oriented development among the member countries. Signi®cant positive side-effects of economic regionalism are already evident in Europe in particular, where strategies of economic growth, competitive impulses, and convergence are being successfully cultivated. Open regionalism today is widely considered as a dynamic tool of outward-oriented development. The emphasis on open regionalism is a matter of interest and priority in Asia, and its appeal is evident from the enlarging membership of APEC and ASEAN groups. The future enlargement of the South Asian Association for Regional Cooperation (SAARC) is also a possibility, embracing Central Asian nations to the north, Myanmar and Laos to the east, and Iran and Afghanistan to the west. In the current environment of economic globalism, continent-based integration in Asia is both desirable and necessary. In formulating the future strategies of regionalism, the leadership of various sub-regional groups in Asia should examine the desirability of enhanced cooperation aiming at a continent-based integration. Once the Asian economic integration becomes a continent-based reality, it would be open by virtue of regional integration agreements (RIAs) to most sub-regions in Asia, including South Asia. Indeed, the scope of an Asian integration is of special signi®cance for South Asia. Within the framework of Asian integration, the South Asian countries would be able to enhance its vision and agenda for expanded trade and investment activities and reinforce economic links with the global economy. There is a decades-old impasse on economic cooperation in South Asia, despite the twin problems of poverty and underdeveloped and underutilized regional potential. South Asian membership in Asian integration will become instrumental in expanding and increased utilization of the existing economic potential and reducing poverty. For outward-oriented development in South Asia, open regionalism is a necessary condition and a needed countervailing power. However, regionalism alone cannot succeed unless accompanied by much-needed key institutional changes. It is, therefore, essential for South Asian political leadership to seize these global opportunities in a timely manner. A quick and concerted action on open regionalism and institutional changes can create an economic breakthrough in South Asia, leading it to become an active partner in Asian economic integration and global economy. The focus of this paper is speci®cally on South Asia and advocates its membership in this evolving paradigm of Asian integration. It also emphasizes much needed institutional changes. The paper is organized in ®ve sections. The ®rst section describes the past as well as current trends in economic regionalism in Asia and particularly in South Asia. The second section discusses the progress underway in economic regionalism across the world. The third section is a commentary on the South Asian dilemma over priorities and potential. The fourth section outlines selective institutional changes as part of a proposed strategy for South Asia. The paper concludes with a few policy recommendations.
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1. Regional integration agreements in Asia Why should South Asian countries move aggressively on re-examining strategies of open regionalism and recreate their economic links with other sub-regional groups in Asia? Enhancing this agenda, initiating new approaches, exploiting its huge economic potential, and achieving an equitable share in global prosperity are powerful arguments. APEC, ASEAN, SAARC are existing expressions of economic regionalization in Asia. Over the long run emerging relationships between these sub-regional groups have the potential of evolving into a continent-based integration. Already, an Indian Ocean group consisting of 47 sovereign countries is at an exploratory stage. The relative success achieved so far in their economic objectives by the Asian trading blocs is central to enlarging Regional Integration Agreements (RIAs) and eventually to creating a single market by merging all sub-groups in Asia. Initiatives in economic regionalization in Asia such as ASEAN in 1967, SAARC in 1985, and APEC in 1989 offered an agenda and vision for future programs and economic cooperation. However, the current momentum of economic globalism has dictated to developing and industrialized countries the necessity of a high degree of competitiveness and strong economies. The far-reaching economic and political implications of these conditions have forced nation-states to consider a commitment to the principles of continentbased integration. Given these trends Asian integration's future membership will probably comprise Paci®c countries, as well as Central, East and South Asian countries. The Asian Economic Union (AEU), or simply AU, as it most likely would be named eventually, will bring into its fold more than 30 countries with a combined GDP of over $9.5 trillion and more than half of the world's populationÐ3.5 billion people. South Asian economies have found the expression of their regional aims in SAARC. It was established in 1985, and there are indications of deepening and widening integration in the region. It also continues to make some progress toward the broader goals of economic liberalization and outward-oriented development (Khan, 1999). A pro®le of deepening and widening integration in South Asia is outlined in Table 1. Table 1 SAARC: deepening and widening Deepening
Widening Pre-1947 (RI 5a)
Economic Union SARC SAARC SAPTA SAFTA
1983 (RI 7b)
1985 (RI 7b)
1995 (RI 7b)
2001 (RI 7b)
b
Future potential (RI 16c) b
b b b b
Source: SAARC Documents (1988±1995). a Pre-1947 economic union refers to Subcontinent India, Afghanistan, Nepal, Sri Lanka, and Myanmar. b Regional integration membership. c Future potential for widening includes central Asian republics, Afghanistan, Iran, Mynnmar, Loas.
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The charter and agenda of SAARC suggest that it is a product of a great vision and a serious effort. For instance, the charter of SAARC aims ``to promote the welfare of the people of South Asia and to improve their quality of life; to accelerate mutual trust, understanding and appreciation of one another's problems; and to promote active collaboration and mutual assistance in economic, social, cultural, technical and scienti®c ®elds'' (SAARC, 1988). A chronology of events showing progress toward economic integration in South Asia follows. 1983 1985 1987 1995 2001
Adoption of Declaration on South Asia Regional Cooperation (SARC) Establishment of South Asian Association for Regional Cooperation (SAARC) Establishment of the SAARC Secretariat SAARC Preferential Trading Agreement (SAPTA) became operational A treaty regime on South Asian Free Trade Area (SAFTA)
However, progress on South Asian Preferential Trading Agreement has been marred by bilateral disputes and the realization of a treaty regime for a South Asian Free Trade Area is slow to evolve. The consensus among all member countries is that the SAFTA aims, if realized, will promote a liberal trading environment, especially intra-regional trade and investment activity. Clearly the road to accelerated development in South Asia is through the SAARC's economic agenda in general and continuous progress on SAFTA in particular. While the SAARC action plan is a multifaceted program of regional cooperation, SAFTA can be considered a dynamic vehicle for stimulating intra-regional trade and investment. These are indeed positive developments and show that SAARC has a workable framework of economic integration. Additionally, since late 1980s, several South Asian countries to promote twin objectives of development and integration have undertaken concrete programs of economic reforms and trade and investment liberalization. For example, Sri Lanka is continuing the reform process that began in 1985 by reducing the dispersion in effective rates of protection. In 1987, Pakistan began shifting from a positive list of permissible imports to a negative list. Both India and Pakistan, in 1993, removed numerous restrictions on imports of capital and intermediate goods. Prior to tariff reform, the average nominal rate in the region was above 80%, but the rate had dropped to 53% by 1993. In 1997, the region's average tariff declined to 34%, and the number of tariff rates has also been reduced; policy negotiations to reduce the average to 18% are currently underway (Khan, 2001). These reforms reinforce development efforts and the process of economic integration in South Asian. The progress on the SAARC economic agenda and reform has been disappointingly slow and often comes to a halt due to cross-country tensions, which have been rather frequent in the region. For example, there have been three major wars between India and Pakistan, cross border insurgency between India and Sri Lanka, water disputes between India and Bangladesh, and frequent political tensions between India and Nepal (Khan, 2001). Intraregional trade, in volume and value, is still nominal, accounting for only 3% of the total. The prevailing attitudes and inherent contradictions in South Asian countries must be overcome and economic impasse must end. Unless South Asian leadership implements the SAARC
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action plan, they will not be able to either enhance or utilize the region's economic potential and will continue to lag behind in economic development. Denying the region an active participation in the global economy also deprives its people of their fair share of global prosperity. Therefore, in an integrated development strategy for South Asia, to achieve a measured progress on open regionalism is the ®rst step. 2. World trends in regional integration agreements Economic globalism and its challenges are the major forces behind the growing acceptability and expansion of economic regionalism across the world. The upgrade of subregional groups into continent-based integration is on the horizon. Among the key factors promoting its integration are increased internationalization of global markets, countries' efforts to lock-in economic and political reforms, integration as an effective medium for enhancing both foreign policy and security interests, while guiding and accelerating the transition to a market economy (Hoekman & Kostecki, 2001). In today's world, economic integration encompasses most of the industrialized nations, emerging markets, economies in transition and the developing world. Integration is commonly viewed as a protective umbrella against the onslaught of economic globalism on one hand, and an effective tool for outward-oriented development on the other. It is considered a mechanism for strengthening individual economies as well as their regional competitive positions in the global markets. It also is a key to in¯uencing events in the global economy (Table 2).2 Table 2 Regional integration agreements (RIA's) RIA's
Typea
Scope of activities
Deepening/ widening integ.
EU (1994)
Economic union
Deepening, widening
APEC (1989)
Free trade area regional trading group Free trade area trading bloc
Harmonization and convergence of domestic policies, centralization of regional economic policies Free and open trade, economic liberalization (FDI) Comprehensive free trade agreements among the North American states Promotion of economic cooperation, commitment to common regional security and defense arrangements Promotion of the welfare of the people: collaboration in economic, social, cultural, technical and scienti®c ®elds Administering the trade agreements negotiated by its members, facilitation of intra-regional trade in goods, services and intellectual property rights
NAFTA (1992) ASEAN (1967)
Free trade area intra-regional cooperation
SAARC (1985)
Free trade area regional cooperation
WTO (1995)
International trade organization
Deepening, widening Deepening, widening Deepening, widening Deepening, widening An aid to deepening integ.
Source: various publications. a These types are ideal. Many members fail to conform to de®nitions and integration agreements.
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Current and most recent developments in RIAs indicate positions taken by the key players as well as serving as guide posts for future paradigm of integration (see Note 2). At a time when the division of the world into major trading blocs is emerging as the trend of the future, there is good evidence that open regionalism is evolving into a continent-based framework. The orientation of EU, the most successful regime of economic integration, from the very outset has been a continent grouping. The guidelines for widening, agreed upon at its summit in Nice in December 2000, con®rm the continuation of this trend. All 13 candidate-countries for EU membership are from central and east Europe. The economic integration of the European continent will eventually stretch from Ireland across to the Baltic States and to Bulgaria in the Southeast. European integration's evolution from FTA in 1960s to the current state of EU is a remarkable example of economic deepening. The proposed integration of the Americas (FTAA) into a single market, to be completed in January 2005, will be a continent grouping including all countries of both North and South America. The Americas' single market will stretch from the Bering Strait to Cape Horn, encompassing 34 countries with a total population of 800 million and a combined GDP of almost $12.5 trillion (Business Week, April 23, 2001). This is a big leap towards widening integration. Recently, the African leadership endorsed a plan to launch a continent-based African Economic Union similar to the EU and other emerging economic unions. Economic integration among Africa's 53 countries, with a population of about 850 million and an estimated GDP of $800 billion, is aimed at substantially reducing import tariffs and dismantling non-tariff barriers to trade and investment. It is also planning to create a central bank and common currency for the entire African continent (Financial Times, July 10, 2002). The announcement indicates a framework of deepening and widening integration. Lately even some smaller regions are initiating economic integration agreements. The Caribbean community (Caricom) had announced on July 12, 2001, that it would establish an economic union integrating its 14 member countries, with a cumulative market of 13 million people. The Caribbean Union's goals are to promote trade in services, free movement of capital, progressive dismantling of barriers to trade, and a regime of common tariffs on imports from non-member countries. Future plans also envision establishing a regional court to adjudicate trade disputes and to creating a common currency administered by a regional monetary authority (Financial Times, July 13, 2001). A chronology of other events across the world concerning integration indicates substantial progress both towards deepening and widening. The establishment of a monetary union in Europe, the ongoing negotiations for an Asian Free Trade Area (AFTA), and in July, 1994, creation of the ASEAN Regional Forum (ARF)Ða multilateral security group with regional economic aims that includes China, Russia, the United States and 15 other membersÐall point toward widening and deepening regionalism around the world. Most of these trading blocs are being promoted in the spirit of open regionalism, and to strengthen their respective competitive positions in global markets (Khan, 1996). Parallel developments in the success of the Uruguay Round of the GATT and the initiatives of World Trade Organization (WTO) are proving to be balancing instruments to any threats of inward-looking regionalism, trade retaliation, or indirect protection. How well these institutions will succeed in liberalizing trade, services and investment ¯ows, given the restrictive trade practices of major industrialized nations, particularly of the U.S. and the
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Europeans, is not yet certain. However, these international institutions would serve as strong links in evolving a continent-based integration. The approaches, institutions, and instruments discussed in Sections 1 and 2 are going to have a profound impact on shaping the 21st century world economic order. They will also prove to be the key to guiding the countries into the 21st century and to exploiting the enormous economic potential. 3. South Asian dilemma and potential I have never been free of an intense awareness of the momentous human drama of the desperate striving for national consolidation and economic development in the south Asian countries. Gunnar Myrdal Asian Drama, 1968
Gunnar Mydral's observations sum up the peoples' hopes and worthwhile efforts in South Asia for accelerated development and common prosperity in the whole region. However, the political leadership in most of the South Asian countries is embroiled in disputes and distrust. Consequently, efforts have been stalled to resolve the many diverse problems in the region. The current situation presents a two contrasting world-views: prosperity through economic cooperation versus poverty through confrontation and poses a dilemma which way to decide in the face of disputes and distrust. The South Asian dilemma has created an impasse over determining priorities pertaining to economic cooperation and territorial disputes. So far preoccupation with territory has taken precedence over economics. It appears preoccupation with territorial disputes and bilateral con¯icts have blurred the leaders' vision and hardened their attitudes. Despite peoples' hopes and the region's huge resources and enormous potential, this dilemma continues to hamper efforts towards reconstruction, development, and reducing poverty. Notwithstanding over ®ve decades of development efforts in the South Asian region, negative effects of the impasse are obvious: low economic and social indicators, and underdeveloped and underutilized economic potential. 3.1. Economic indicators Leading economic indicators, such as GDP growth rates, GDP per capita and its growth rates, share in world trade and foreign direct investment (FDI), trade to GDP ratios and factor intensity of exports remain extremely low both in absolute and relative terms. Empirical evidence clearly highlights this problem. The data on economic indicators presented in Table 3 show South Asian countries faring relatively well in achieving respectable growth rates in their GDP. Since the 1970s, the GDP growth rates for these countries show a consistent rise. For example, from the 1970s to 2000 Indian growth rates rose from 3.4% to 6%. Bangladesh growth rate for the same period rose from 2.4% to 4.8%. Their growth rates, however, lag far behind the double-digit rates achieved in China, 7.0% in Malaysia and 5.7% in South Korea. The rates of growth in South Asian countries are
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Table 3 Economic indicators Country
Population growth rate (%)
Average annual growth rate (%; GDP)
Average annual per capita growth rate (%; GNP)
Average Annual (1995±1999) (1999±2015)
1970±1980 1980±1990 1990±2000
1980±1991
South Asia Bangladesh India Nepal Pakistan Sri Lanka
2.4 2.0 2.2 2.8 1.4
1.9 1.3 2.2 2.5 0.8
2.3 3.4 ± 4.9 4.1
4.3 5.8 4.6 6.3 4.0
4.8 6.0 4.8 3.7 5.3
1.6 3.2 2.1 3.2 2.5
3.8 3.9 3.1 3.4 4.2
East Asia/China China Indonesia Malaysia Philippines South Korea
1.3 1.8 2.4 2.4 1.1
0.7 1.1 1.5 1.6 0.5
± 7.2 7.9 6.1 9.6
10.2 6.1 5.3 1.0 9.4
10.3 4.2 7.0 3.3 5.7
7.8 3.9 2.9 1.2 8.7
7.3 3.1 6.0 2.1 7.8
Latin America Argentina Brazil Mexico Peru
1.4 1.8 2.0 2.1
1.1 1.1 1.3 1.5
2.5 8.1 6.3 3.5
0.4 2.7 0.7 0.3
4.3 2.9 3.1 4.7
1.5 0.5 0.5 2.4
1.7 3.2 5.4 1.9
1999±2000
Sources: World Bank (2001), World Development Report 1993, 1995, 1997, 1998, 1999, 2000±2001, Oxford University Press, New York.
comparable to Latin America and other developing countries. But when comparisons are made on the basis of annual per capita income growth rates, with China, Malaysia and South Korea in particular, they have remained disproportionately low in South Asia countries. One reason for this poor performance could be the higher population growth rates in South Asia countries compared with population growth rates in China and East Asia countries but disputes and distrust have played a signi®cant role. South Asian shares in world trade and FDI also raise concerns. They have been consistently the lowest compared to other regions. For example in 1998 and 1999 these shares have been 1.1% and 0.5% compared to East Asia's 12.2% and 3.0% (Table 4). Since 1970, trade to GDP ratios, a direct result of economic reforms and liberalization of trade and investment, have expanded for most developing countries (Table 5). Again, expansion in South Asia is the lowest, which probably is the direct result of the slow pace and half-hearted efforts in adopting economic reforms and liberalization policies. Another interesting indicator is the factor intensity of exports. Data shows that during the 1980s and 1990s the factor content of trade has also changed signi®cantly. The evidence indicated that South Asia, which had produced mainly natural resource intensive commodities during the 1970s and 1980s, began to employ more unskilled labor, which was abundant in South Asian countries. No signi®cant progress seems to have taken place in South Asia in the use of technology and human capital when compared to East Asia and
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Table 4 World trade and FDI shares Region Industrial countriesa East Asia and Paci®c South Asia East Europe and Central Asia Sub-Saharan Africa Latin America and Caribbean
World trade share
FDI share in GDP
1998
1990
1999
72.0 12.2 1.1 5.2 1.3 5.7
1.0 1.6 () () 0.3 0.7
2.0 3.0 0.5 2.9 2.4 4.5
Source: world trade shares. UN Comtrade database. FDI Share: Human Development Report 2001. a Industrial countries 1988 and 1998. Table 5 Trade to GDP ratios Region
1970 (%)
1980 (%)
1990 (%)
1998 (%)
South Asia East Asia and Paci®c Sub-Saharan Africa Latin America and Caribbean
12 13 41 22
18 36 52 27
20 49 50 28
28 66 56 35
Source: World Bank SIMA database.
Latin America, where it has increased rapidly and signi®cantly (Table 6). Sub-optimal use of technology and human capital in the productive process of exports is due to the meager in¯ows of FDI and the high rates of illiteracy existing in South Asia, particularly in India, Bangladesh, Nepal, and Pakistan. 3.2. Social indicators The social indicators for the last three decades presented in Table 7 show that life expectancy gradually rose, infant mortality dropped, and adult illiteracy declined in the Table 6 Factor intensity of exports (1988 and 1998) Region
Natural resource
Unskilled labor
Technology
Human capital
1988
1998
1988
1998
1988
1998
1988
1998
Industrial countries
22.51
17.9
9.8
9.7
39.4
45.2
28.3
27.1
Developing countries East Asia South Asia Latin America Sub-Saharan Africa East Europe and Central Asia
27.2 50.2 67.0 78.3 38.0
16.8 15.9 42.4 79.0 37.6
30.5 35.9 5.8 6.0 23.9
24.0 81.2 9.3 5.9 18.4
23.8 7.9 13.4 6.6 20.2
42.6 2.2 25.4 7.7 21.3
18.5 6.1 13.8 9.1 17.8
16.6 0.6 22.9 7.4 22.7
Source: UN Comtrade and World Bank.
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Table 7 Social indicators Life expectancy (at birth years)
Infant mortality (per 1000 live births)
Adult illiteracy rates (%)
Population below income poverty line (%)
1970
1991
1999
1980
1991
1999
1970
1991
1999
$1 a day (1993 PPP US $) (1983±1999)
National poverty line (1984±1999)
South Asia Bangladesh India Nepal Pakistan Sri Lanka
44 49 42 49 65
51 60 53 59 71
61 66 58 63 73
132 116 190 124 34
111 90 102 101 25
81 71 75 95 17
76 64 87 79 23
65 52 74 65 12
61 47 62 59 9
29 44 38 31 7
36 35 42 34 25
East Asia/China China Indonesia Malaysia Philippines South Korea
62 48 61 57 60
69 60 71 65 70
70 66 72 69 48
42 90 30 52 26
42 68 15 42 22
38 45 10 32 6
± 46 40 17 12
27 18 22 10 4
14 15 14 5 3
18 8 0 ± 2
5 27 15 37 ±
Latin America Argentina Brazil Mexico Peru
66 59 61 54
71 66 70 64
74 67 72 69
35 70 51 81
30 59 37 80
21 37 29 44
7 34 26 29
5 19 ± 15
4 16 10 12
± 9 12 15
± 22 10 49
Sources: World Bank (1999), World Development Report 1993, 1995, 1997, 1998, 1999, Oxford University Press, New York.
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Country
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South Asia countries. However, compared with China and with East Asia countries, these improvements are insigni®cant. In South Asian countries, life expectancy is lower, infant mortality is higher, and adult illiteracy is much higher than in China and East Asia and Latin American countries. Population below poverty line in South Asia countries is signi®cantly higher than in China, East Asia, Latin America, and many other developing countries. Even where the South Asia countries had an advantage in the economic ®eld, they fall behind in East Asia, Latin American, and North Africa countries in social improvements. Despite SAARC agenda and outward looking policies, all leading economic and social indicators in South Asia are low both in absolute and relative terms. Fortunately, there is a bright side to this picture: enormous economic potential. 3.3. Economic potential This brings us to a discussion of the impact of South Asia's dilemma on the region's underdeveloped and underutilized economic potential. Its opportunity cost in terms of foregone GDP and suppressed living standards is substantial. For example, cross-country and cross-region data con®rms the wide scope of economic potential and the extent of its underutilization. Cross-country data pertaining to GNP per capita and GNP per capita average annual growth rates for Bangladesh, India, Nepal, Pakistan, and Sri Lanka for 1980 and 2000 are signi®cantly lower than for China, Indonesia, Korea, Malaysia, and Thailand, Table 8. Future prospects show the widening of income gaps, since rates in 2000 for East Asian countries are signi®cantly higher than the South Asian countries. A sharp contrast is obvious between the growing income gap when Pakistan and India are compared to Korea, Malaysia and China. It is interesting to note that in mid-1960s Korea, Malaysia, and China were at a par with India and Pakistan in per capita income bases. In 2000, the per capita income in Korea, Malaysia, and China was 19, 7 and 2 times higher than in India and Pakistan. This Table 8 Per capita GNP Country South Asia Bangladesh India Nepal Pakistan Sri Lanka East Asia China Indonesia Korea Malaysia Thailand
Dollars (1980)
Average annual growth rate (1960±1980)
Rank (1999)
Dollars (2000)
Average annual growth rate (1999±2000)
80 240 140 300 270
0.1 1.4 0.2 2.8 2.4
167 162 194 160 137
380 460 220 470 870
3.8 3.9 3.1 3.4 4.2
290 430 1520 1620 670
4.8 4.0 7.0 4.3 4.7
140 150 51 82 102
840 570 8910 3380 1960
7.3 3.1 7.8 6.0 3.5
Source: World Bank (2001), World Development Report, 1982, 1984, 2000±2001, Oxford University Press, New York.
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gap is further widening with the higher average growth rates found in the East Asian countries. The GDP gap in India and Pakistan in 2000 is shocking. Estimates of income gap are based on using per capita GDP in 1960 and 2000, and population size of 1.2 billion in 2000 in India and Pakistan and comparing it with the economic performance rates in South Korea, Malaysia and China: At South Korean per capita ($8910), the income gap is $11.6 trillion. At Malaysian per capita ($3380), the income gap is $3.9 trillion. At Chinese per capita ($840), the income gap is $600 billion. This low level of economic performance compared with an estimated potential show how far South Asia has fallen short of the level of development it ought to have obtained. Without breaking the long-standing impasses and dilemmas, any strategy including open regionalism to tackling economic issues will remain ineffective. In this regard there are lessons for South Asian leaders to learn. They should seriously examine the existing economic relationships between China and Taiwan, China and Japan, Russia and Japan, and Russia and the U.S.A. Presently and even during the post-Cold War period despite differences on territorial and security matters, they have pursued consistently pragmatic economic strategies. Their disputes have not been allowed to suppress economic relationships or stand in the way of progress. For achieving the objectives of economic development and common prosperity, the South Asian leadership should break the impasse and adopt similar pragmatic approaches so that the economic programs are not left in limbo. This means no more dilemmas in deciding in favor of economic cooperation. Otherwise the risk of falling behind is greater. How to enhance the exploitation of the enormous potential of the regional economy and take advantage of the existing opportunities in the international economy and make open regionalism more effective needs a concrete approach that is outlined in Section 4. 4. Proposed South Asian strategy The principles of good government, the inducements to individual performance, the role of popular enlightenment, the foundations of thrift, the effect of competition and of monopoly, the relation between social classes, the reasons why some people, notably the English, worked hard and others, notably the Irish, were idle, were all grist for their highly diversi®ed mill. Anything that was deemed to have a bearing on economic advance came into the discussion. The only test was broad relevance to the questions: What made for economic progress? Or, on the other hand, what led to stag¯ation- to the much discussed stationary state? John Kenneth Galbraith Economic Development, 1964 The classicists had ``concerned themselves with the aggregate requirement of process.'' From this vantage point, Galbraith sees ``some serious shortcomings in the modern discussion'' of the underdeveloped countries, and states: ``We have given too little attention
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to inquiring whether the things that contribute to economic development are being employed in a context that is favorable to development.'' Gunnar Myrdal Asian Drama, 1968
Galbraith (1964) and Myrdal (1968) argue in favor of an institutional approach, a notion driven by the classical school's intellectual activities. We also advocate institutional changes along with open regionalism for SAARC to accelerate outward-oriented development and harmonize development policies with the forces of economic globalism in South Asia.
The institutional approach is a key to formulating and implementing the economic programs of South Asia and a complement for open regionalism strategies. To address the development challenges in South Asia, our suggestions are highly selective and underscore the signi®cance of the institutional factors:
creation of development-friendly environment shift from geo-political to geo-economic approach good governance marginal productivity-based allocation of resources investment in human capital efficient economic management
Adopting political and economic reforms in South Asia can enhance a developmentfriendly environment. In this discussion, democratic systems, human right issues, political stability, macroeconomic stability, outward-looking strategies, market-oriented business practices, and a comprehensive legal framework are essential. Currently not a single country in the region can claim to have come even close to achieving the benchmarks set in these areas by leading European, North American, and East Asian economies. Democracy is important not just for political stability and moral reasons but also for more fair and effective economic development (UNDP, 2002). Additionally, the ``rules of the game'' require truly entrepreneurial activity and competitiveness in the market. Business leadership should respect and practice principles of risk taking, innovation, and competition. Factors like development and enforcement of the legal framework in accordance with the needs of local economy, such as contracts and bankruptcy laws, are the fundamental condition for creating a friendly
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environment. Moreover, achieving and maintaining macroeconomic stability by implementing effective budgetary and monetary policies are strategies hospitable to investment. A geo-economic approach will promote a dynamic pro®le of open regionalism and strengthen SAARC's economic agenda. For this to happen, a shift from a security-oriented, geo-political framework to a development-oriented, geo-economic strategy is essential (Dutta, 1999).3 De-emphasizing geo-political considerations automatically frees scarce resources (peace dividends in the post-Cold War period) from defense and security spending. These resources can be channelized, according to geo-economic considerations, into civilian sectors, particularly investment in priority development projects. The geo-economic approach has a great potential for accelerating development, increasing common prosperity in the region, and establishing strong economic links with the more productive sectors of the global economy. The aggressive pursuit of geo-political interests in the past has had a negative economic impact. Major South Asian countries like India and Pakistan belonging to opposite camps (India's close association with the Soviet bloc and Pakistan ®rmly in the Western camp) had changed the geo-political landscape of the South Asian region. This divide had far reaching effects on reaching agreements on regional disputes. Geo-political rivalries resulted in hardening of attitudes on both sides. The disputes that might have been resolved through bilateral exchanges or international negotiations took a life of their own and became a never-ending contest. In other words Cold War geo-political climate in the sub-continent have perpetuated territorial disputes justifying huge defense budgets. This expenditure has substantially increased the opportunity-cost of economic development. Good governance would be a development-friendly approach for South Asian countries. Instead they suffer from poor governance that is a formidable impediment to development. There is little evidence that under poor governance economic endeavors would succeed in these countries. The problem is enormous and complicated. Public institutions that provide good governance in South Asian countries are grossly lacking. Legal, political, and economic institutions are generally weak and corrupt. This weakness has limited the scope of business opportunities and promoted monopolies. Corruption is a major factor in undermining the ef®cient functioning of markets in South Asian countries in many ways. For instance, corruption in South Asia has taken the form of a private tax; has become an instrument of blocking entry to markets; has played a key role in subverting the legitimacy of the state; and has served as a vehicle for concentrating wealth in fewer hands. Corruption as a tax has distorted economic choices, and bribes have increased the opportunity cost of investment.4 This practice has not only lowered the levels of economic ef®ciency but has also constrained returns on both public and private investment. By promoting monopoly practices corruption in South Asia has often restricted the entry of ®rms. License Raj is a good example of ®rms paying huge bribes to gain entry into markets. Small and capital-short ®rms have often been blocked out of markets. Corruption has stigmatized the legitimacy of government, speci®cally in Bangladesh, India, and Pakistan. A lack of democracy and absence of its traditions of accountability has only worsened the problems of governance. A glimpse of how democracy is practiced in South Asia is an example. What is democracy anyway?' screams a headline in the New York Times of May 3 over a column by Nicholas Kristof. He opens up: ``If there was a form of government that produced
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autocrats who sponsored terrorism, stole millions of dollars while impoverishing their citizens, shredded public education and health, permitted child bondage, tortured dissidents and tolerated pogroms against minorities then we would all condemn it. Except that in South Asia such a system is called democracy.
Without better governance, extremism is likely to ¯ourish, as is the case in Pakistan. This situation undermines national and international endeavors in achieving effective development. According to the basic principles of marginal productivity, sectors yielding higher returns such as technology and human capital should receive higher allocations. Increased investment is needed in these highly productive sectors. Contrary to this principle, resource use in the South Asian countries is biased in favor of big capital projects and defense expenditure. These are relatively low productivity and low priority sectors. Resources for education, health, and technologies have been inadequate. For example, India and Pakistan have been spending 3% and 6% of GDP on defense during the last ®ve decades (1950s± 1990s), Table 9. Human capitalÐeducation, knowledge, skills, and healthcareÐis a highly productive sector in South Asia, yet in the past ®ve decades it has received only meager investment, Table 9. It is also a critical factor for investment for higher productivity and poverty reduction. If South Asian countries are to achieve faster economic growth, they must increase substantially their investment in human capital. Education in poor countries like India and Pakistan yields high returns as knowledge and skills contribute to productivity in the workplace. As is obvious from the ®gures in Table 10, investments in primary education have the highest yield. Additionally, investment in primary education, compared to investment in physical capital, is known to have higher returns also. Estimates in this area indicate 11% to more than 30% higher returns. Investment in the education of girls can yield even higher returns (Mingat & Winter, 2002). Countries in South Asia must pay special attention to investment in human capital. Ef®cient economic management and pragmatic approaches are essential for a successful outcome of development endeavors. The remarkable successes achieved by China and the Asian Tiger countries of Hong Kong, Singapore, South Korea, and Taiwan strongly support this point. These countries have saved and invested, used abundant resources, particularly labor, and invested in education to increase the productivity of human capital. Their governments have been stable and ef®cient and adopted outward-oriented development policies. They have been business friendly and encouraged their companies to compete, export, and succeed in the world markets. Through a strategy of ef®cient economic management they have become model-developing economies. These are good examples for South Asia countries to pursue. Most contemporary development approaches have tended to ignore institutional changes. Obviously, ``too little attention has been paid to inquiring whether the things that contribute to economic development are being employed in a context that is favorable for development,'' (Myrdal, 1968). This must be changed as we start the 21st century. In order to achieve a successful outcome of continent-based integration in Asia, the ``Asianization of South Asia'' is critical due to its demographic pro®leÐalmost one-fourth
782
HDIa
115 127 87
Countries
India Pakistan China All developing countries High human development countries Medium human development countries Low human development countries
Defense expenditure (as % of GDP)
Defense expenditure (as % of combined education and health spending)
Public expenditure
1990
1960
Health (% of GNP)
Educationb (% of GNP)
1960
1990
1985
1990±1995
0.5 0.3 1.3 1.0 1.2 0.9 0.6
1.3 1.8 2.1 2.0 2.1 2.1 1.5
3.2 3.1 2.3 4.1 4.1 4.2 3.2
3.2 2.7 2.3 3.8 4.1 3.6 ±
2.9 5.7 2.7
1999
2.4 4.4 2.1
68 393 ± 102 67 159 76
1990±1991
65 125 23 63 38 84 66
Source: UNDP (1998), Human Development Report 1998, Oxford University Press, New York. a Human Development Index (HDI) a composite index of achievements in basic human capabilities in three fundamental dimensions: a long and healthy life, knowledge, and decent standard of living. b For India, Pakistan, and China, public expenditure on education is for 1985±1987 and 1995±1997.
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Table 9 Sectoral resource allocation
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Table 10 Education yield in low-income countries Education categories
Private return (%)
Social return (%)
Primary schooling Secondary schooling Higher education
26.4 18.5 22.4
20.6 14.1 11.3
Source: Psacharopoulos (2000).
of humankindÐand its huge economic potentialÐknowledge, skills and markets. The combined strategies of open regionalism and institutional changes offer the best hope for the South Asia, in economic development and in becoming an active sub-group of the Asian integration. 5. Conclusions Progress on open regionalism is gaining momentum day by day, and economic globalism, in its present form, will remain a pervasive force in the world economy for quite some time. Consequently, nation-states and trading blocs are ambitiously harmonizing economic policies to promote a productive relationship between their development programs and the forces of economic globalism. The strategies of deepening and widening are popular among them. Moreover, evolving open regionalism into continental-based phenomena would help them achieve countervailing power, which they can use to their advantage. These considerations make it inevitable for open regionalism to grow into a continental integration. Already big and strong regional groupsÐEuropean Union (EU), North American Free Trade Agreement (NAFTA), Asia Paci®c Economic Cooperation (APEC)Ðare enlarging their scope of trade relations and membership. Scholars, researchers, and policy makers are helpful in designing more innovative theoretical and practical models to enhance the economic propensities/potential of regional trading groups. The future direction indeed points to continent-based integration across the world. The European Union (EU) is already a continent-based economic union. The North American Free Trade Agreement (NAFTA) is aiming to create a single market of the Americas (FTAA) by 2005, the Asian Economic Community is emerging as a strong framework for a continent-based integration, and recently African leadership has committed itself to establishing economic union embracing the entire African continent. South Asian countries playing their part must recreate SAARC in the true image of open regionalism. The economic future of South Asia is anchored in an open regionalism of Asian scope. Along with open regionalism, adoption of an institutional approach will ensure a dynamic outward-oriented development in the South Asian countries. The creation of a more development-friendly environment, geo-economic approaches, good governance, the allocation of suf®cient resources for civilian sectors especially social services, and accelerating the development of human capital along with better economics management will evolve a very prosperous 21st century for the South Asian people.
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Notes 1. ``Economic globalism'' in this paper is used for ``globalization.'' Globalization can be used in the context of cultural, social, political, and economic trades. Economic globalism speci®cally focuses on economic affairs only. For example, economic globalism is a process that focuses on the free ¯ow of ideas, goods and services, and capital across the international borders. It accelerates the pace of global integration by increasing cross-country interdependence, intra- and inter-regional trade, and promoting market environment. ``Outward-oriented development'' is economic development driven by open regionalism's activities of inter-regional trade, foreign direct investment, and technology transfer. 2. Some of the alternative models of economic regionalism which are both common and popular are: free trade area, custom union, common market, economic union, and trade preference association. Free Trade Area (FTA): in FTA, trade restrictions among member countries are removed. However, each member retains its own tariff structure against outside countries. Custom Union (CU): a CU is a FTA with common external trade policies among its member countries. Common Market (CM): a CM is a CU that also allows for the free movement of factors of production (resources). Economic Union (EU): an EU is a CM that includes some degree of harmonization of national economic policies of member countries. 3. In a map-of-the-world view and in geo-economic terms, South Asia comes within the fold of Asian Economic integration. As an economic unit South Asia is a regionspeci®c institutionalized cooperation of seven sovereign-state-based economies known as South Asia Association for Regional Cooperation (SAARC)ÐBangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. In 1999, South Asia population was 1329 million and total GDP was $2.7 trillion measured at PPP (World Bank, 2001: World Development Report 2000/2001). It is a region with massive potential, and will be a contributing partner in an Asian Economic Union and the international economy. 4. According to an Asian Development report (Asian Development Bank, 2002), released on August 12, 2002, ``The level of poverty worsened (in Pakistan) from 26 percent of the population falling below the poverty line in 1993 to 32 percent in 1999. ``Poor governance'' was cited as one of the primary causes of poverty in Pakistan, which has seen'' three out of the four last civilian governments. . .dismissed prematurely. . .on charges of corruption.'' References Asian Development Bank. (2002). Poverty in Pakistan: issues, causes and institutional responses. August 12, 2002, Manila. Business Week. (2001, April 23). Betting on free trade. New York: McGraw-Hill. Dutta, M. (1999). Economic regionalization in the Asia-Paci®c. Cheltenham, UK: Edward Edgar. Financial Times. (2001). Single market for Caribbean. July 13, 2000, New York. Financial Times. (2002). African Union. July 10, 2002, New York.
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Galbraith, J. K. (1964). Economic development. Cambridge: Harvard University Press. Hoekman, B. M., & Kostecki, M. M. (2001). The political economy of the World Trading System. Oxford, New York. Khan, S. M. (1996). South Asia and APEC: potential for growth enhancement. Research in Asian Economic Studies, Vol. 7, 1996. Greenwich, Connecticut: Jai Press. Khan, S. M. (1999). South Asian Association for Regional Cooperation. Journal of Asian Economics, Vol. 10, 1999. Greenwich, Connecticut: Jai Press. Khan, S. M. (2001). South Asia: a new regional. In: Research in Asian Economic Studies (Vol. 9-B, pp. 545± 561). Amsterdam, The Netherlands: Jai Press. Mingat, A., & Winter, C. (2002). Education for All by 2015. Washington, DC: Finance and Development, IMF. Myrdal, G. (1968). Asian drama (Vol. 1). New York: Pantheon. Psacharopoulos, G. (2000). Les Systemes edfucatifs africains: une analyse economique comparative [cited in Alain Mingat and Bruno Suchaut, 2000]. Burssels: De Boeck University. SAARC. (1988±1995). SAARC Documents: v1988±1991, 1991±1993, 1993±1995. Vol. III, IV & V. Katmandu, Nepal: SAARC Secretariat. UNDP. (1998). Human Development Report 1998. New York: Oxford University Press. World Bank. (2001). World Development Report 2000/2001. New York: Oxford University Press.
Asian economic integration: a perspective on South Asia$ Saleem M. Khan*, Zahira S. Khan Department of Economics, Bloomsburg University, 400 East Second Street, Bloomsburg, PA 17815-1301, USA Received 29 May 2002; received in revised form 23 August 2002; accepted 3 September 2002
Abstract This paper argues in favor of open regionalism and continent-based integration in Asia. These are the effective instruments of outward-oriented development. The enlargement of trading blocs into continent-based integration also serves as a countervailing power to stem the excesses of economic globalism. The case made in the paper shows the need for institutional changes for promoting economic development. Institutional changes along with open regionalism are essential to enhancing outward-oriented development in South Asia. Respectable progress has been made in these areas across the continents in general, and in Asia in particular (ASEAN, SAARC, APEC). Efforts on these initiatives must be redoubled as we start the 21st century. # 2002 Elsevier Science Inc. All rights reserved. Keywords: Open regionalism; Continent-based integration; Outward-oriented development; Economic regionalism
Global trends in open regionalism indicate a gradual movement towards continent-based integration. Growing interest in open regionalism in recent years is to promote outwardoriented development, and to harmonize domestic economic policies with the forces of economic globalism such as liberalization, privatization, deregulation.1 It is not surprising that many sub-regional trading blocs are currently adopting strategies of open regionalism and entering into continent-based integration. Strategic instruments of open regionalism, i.e., deepening and widening, speci®cally focus on building a sound trading structure and to guide merging of regional blocs into a continent-based trading body. The enlargement of the $
24th ACAES International Conference, Beijing, China, May 27±29, 2002. Corresponding author. Tel.: 1-570-389-4681; fax: 1-570-389-4338. E-mail address: [email protected] (S.M. Khan). *
1049-0078/02/$ ± see front matter # 2002 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 9 - 0 0 7 8 ( 0 2 ) 0 0 1 8 4 - 7
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European Union (EU), closer relationship between Association of South East Asian Nations (ASEAN) and Asian Paci®c Economic Cooperation (APEC), launching of the Free Trade Area of the Americas (FTAA), proposed establishment of African Union (AU), and revitalization of other regional arrangements across the world highlight this trend. The framework of continent-based integration when operational, leading development economists argue, will reinvigorate powerful propensities of trade and investment, and reinforce outward-oriented development among the member countries. Signi®cant positive side-effects of economic regionalism are already evident in Europe in particular, where strategies of economic growth, competitive impulses, and convergence are being successfully cultivated. Open regionalism today is widely considered as a dynamic tool of outward-oriented development. The emphasis on open regionalism is a matter of interest and priority in Asia, and its appeal is evident from the enlarging membership of APEC and ASEAN groups. The future enlargement of the South Asian Association for Regional Cooperation (SAARC) is also a possibility, embracing Central Asian nations to the north, Myanmar and Laos to the east, and Iran and Afghanistan to the west. In the current environment of economic globalism, continent-based integration in Asia is both desirable and necessary. In formulating the future strategies of regionalism, the leadership of various sub-regional groups in Asia should examine the desirability of enhanced cooperation aiming at a continent-based integration. Once the Asian economic integration becomes a continent-based reality, it would be open by virtue of regional integration agreements (RIAs) to most sub-regions in Asia, including South Asia. Indeed, the scope of an Asian integration is of special signi®cance for South Asia. Within the framework of Asian integration, the South Asian countries would be able to enhance its vision and agenda for expanded trade and investment activities and reinforce economic links with the global economy. There is a decades-old impasse on economic cooperation in South Asia, despite the twin problems of poverty and underdeveloped and underutilized regional potential. South Asian membership in Asian integration will become instrumental in expanding and increased utilization of the existing economic potential and reducing poverty. For outward-oriented development in South Asia, open regionalism is a necessary condition and a needed countervailing power. However, regionalism alone cannot succeed unless accompanied by much-needed key institutional changes. It is, therefore, essential for South Asian political leadership to seize these global opportunities in a timely manner. A quick and concerted action on open regionalism and institutional changes can create an economic breakthrough in South Asia, leading it to become an active partner in Asian economic integration and global economy. The focus of this paper is speci®cally on South Asia and advocates its membership in this evolving paradigm of Asian integration. It also emphasizes much needed institutional changes. The paper is organized in ®ve sections. The ®rst section describes the past as well as current trends in economic regionalism in Asia and particularly in South Asia. The second section discusses the progress underway in economic regionalism across the world. The third section is a commentary on the South Asian dilemma over priorities and potential. The fourth section outlines selective institutional changes as part of a proposed strategy for South Asia. The paper concludes with a few policy recommendations.
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1. Regional integration agreements in Asia Why should South Asian countries move aggressively on re-examining strategies of open regionalism and recreate their economic links with other sub-regional groups in Asia? Enhancing this agenda, initiating new approaches, exploiting its huge economic potential, and achieving an equitable share in global prosperity are powerful arguments. APEC, ASEAN, SAARC are existing expressions of economic regionalization in Asia. Over the long run emerging relationships between these sub-regional groups have the potential of evolving into a continent-based integration. Already, an Indian Ocean group consisting of 47 sovereign countries is at an exploratory stage. The relative success achieved so far in their economic objectives by the Asian trading blocs is central to enlarging Regional Integration Agreements (RIAs) and eventually to creating a single market by merging all sub-groups in Asia. Initiatives in economic regionalization in Asia such as ASEAN in 1967, SAARC in 1985, and APEC in 1989 offered an agenda and vision for future programs and economic cooperation. However, the current momentum of economic globalism has dictated to developing and industrialized countries the necessity of a high degree of competitiveness and strong economies. The far-reaching economic and political implications of these conditions have forced nation-states to consider a commitment to the principles of continentbased integration. Given these trends Asian integration's future membership will probably comprise Paci®c countries, as well as Central, East and South Asian countries. The Asian Economic Union (AEU), or simply AU, as it most likely would be named eventually, will bring into its fold more than 30 countries with a combined GDP of over $9.5 trillion and more than half of the world's populationÐ3.5 billion people. South Asian economies have found the expression of their regional aims in SAARC. It was established in 1985, and there are indications of deepening and widening integration in the region. It also continues to make some progress toward the broader goals of economic liberalization and outward-oriented development (Khan, 1999). A pro®le of deepening and widening integration in South Asia is outlined in Table 1. Table 1 SAARC: deepening and widening Deepening
Widening Pre-1947 (RI 5a)
Economic Union SARC SAARC SAPTA SAFTA
1983 (RI 7b)
1985 (RI 7b)
1995 (RI 7b)
2001 (RI 7b)
b
Future potential (RI 16c) b
b b b b
Source: SAARC Documents (1988±1995). a Pre-1947 economic union refers to Subcontinent India, Afghanistan, Nepal, Sri Lanka, and Myanmar. b Regional integration membership. c Future potential for widening includes central Asian republics, Afghanistan, Iran, Mynnmar, Loas.
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The charter and agenda of SAARC suggest that it is a product of a great vision and a serious effort. For instance, the charter of SAARC aims ``to promote the welfare of the people of South Asia and to improve their quality of life; to accelerate mutual trust, understanding and appreciation of one another's problems; and to promote active collaboration and mutual assistance in economic, social, cultural, technical and scienti®c ®elds'' (SAARC, 1988). A chronology of events showing progress toward economic integration in South Asia follows. 1983 1985 1987 1995 2001
Adoption of Declaration on South Asia Regional Cooperation (SARC) Establishment of South Asian Association for Regional Cooperation (SAARC) Establishment of the SAARC Secretariat SAARC Preferential Trading Agreement (SAPTA) became operational A treaty regime on South Asian Free Trade Area (SAFTA)
However, progress on South Asian Preferential Trading Agreement has been marred by bilateral disputes and the realization of a treaty regime for a South Asian Free Trade Area is slow to evolve. The consensus among all member countries is that the SAFTA aims, if realized, will promote a liberal trading environment, especially intra-regional trade and investment activity. Clearly the road to accelerated development in South Asia is through the SAARC's economic agenda in general and continuous progress on SAFTA in particular. While the SAARC action plan is a multifaceted program of regional cooperation, SAFTA can be considered a dynamic vehicle for stimulating intra-regional trade and investment. These are indeed positive developments and show that SAARC has a workable framework of economic integration. Additionally, since late 1980s, several South Asian countries to promote twin objectives of development and integration have undertaken concrete programs of economic reforms and trade and investment liberalization. For example, Sri Lanka is continuing the reform process that began in 1985 by reducing the dispersion in effective rates of protection. In 1987, Pakistan began shifting from a positive list of permissible imports to a negative list. Both India and Pakistan, in 1993, removed numerous restrictions on imports of capital and intermediate goods. Prior to tariff reform, the average nominal rate in the region was above 80%, but the rate had dropped to 53% by 1993. In 1997, the region's average tariff declined to 34%, and the number of tariff rates has also been reduced; policy negotiations to reduce the average to 18% are currently underway (Khan, 2001). These reforms reinforce development efforts and the process of economic integration in South Asian. The progress on the SAARC economic agenda and reform has been disappointingly slow and often comes to a halt due to cross-country tensions, which have been rather frequent in the region. For example, there have been three major wars between India and Pakistan, cross border insurgency between India and Sri Lanka, water disputes between India and Bangladesh, and frequent political tensions between India and Nepal (Khan, 2001). Intraregional trade, in volume and value, is still nominal, accounting for only 3% of the total. The prevailing attitudes and inherent contradictions in South Asian countries must be overcome and economic impasse must end. Unless South Asian leadership implements the SAARC
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action plan, they will not be able to either enhance or utilize the region's economic potential and will continue to lag behind in economic development. Denying the region an active participation in the global economy also deprives its people of their fair share of global prosperity. Therefore, in an integrated development strategy for South Asia, to achieve a measured progress on open regionalism is the ®rst step. 2. World trends in regional integration agreements Economic globalism and its challenges are the major forces behind the growing acceptability and expansion of economic regionalism across the world. The upgrade of subregional groups into continent-based integration is on the horizon. Among the key factors promoting its integration are increased internationalization of global markets, countries' efforts to lock-in economic and political reforms, integration as an effective medium for enhancing both foreign policy and security interests, while guiding and accelerating the transition to a market economy (Hoekman & Kostecki, 2001). In today's world, economic integration encompasses most of the industrialized nations, emerging markets, economies in transition and the developing world. Integration is commonly viewed as a protective umbrella against the onslaught of economic globalism on one hand, and an effective tool for outward-oriented development on the other. It is considered a mechanism for strengthening individual economies as well as their regional competitive positions in the global markets. It also is a key to in¯uencing events in the global economy (Table 2).2 Table 2 Regional integration agreements (RIA's) RIA's
Typea
Scope of activities
Deepening/ widening integ.
EU (1994)
Economic union
Deepening, widening
APEC (1989)
Free trade area regional trading group Free trade area trading bloc
Harmonization and convergence of domestic policies, centralization of regional economic policies Free and open trade, economic liberalization (FDI) Comprehensive free trade agreements among the North American states Promotion of economic cooperation, commitment to common regional security and defense arrangements Promotion of the welfare of the people: collaboration in economic, social, cultural, technical and scienti®c ®elds Administering the trade agreements negotiated by its members, facilitation of intra-regional trade in goods, services and intellectual property rights
NAFTA (1992) ASEAN (1967)
Free trade area intra-regional cooperation
SAARC (1985)
Free trade area regional cooperation
WTO (1995)
International trade organization
Deepening, widening Deepening, widening Deepening, widening Deepening, widening An aid to deepening integ.
Source: various publications. a These types are ideal. Many members fail to conform to de®nitions and integration agreements.
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Current and most recent developments in RIAs indicate positions taken by the key players as well as serving as guide posts for future paradigm of integration (see Note 2). At a time when the division of the world into major trading blocs is emerging as the trend of the future, there is good evidence that open regionalism is evolving into a continent-based framework. The orientation of EU, the most successful regime of economic integration, from the very outset has been a continent grouping. The guidelines for widening, agreed upon at its summit in Nice in December 2000, con®rm the continuation of this trend. All 13 candidate-countries for EU membership are from central and east Europe. The economic integration of the European continent will eventually stretch from Ireland across to the Baltic States and to Bulgaria in the Southeast. European integration's evolution from FTA in 1960s to the current state of EU is a remarkable example of economic deepening. The proposed integration of the Americas (FTAA) into a single market, to be completed in January 2005, will be a continent grouping including all countries of both North and South America. The Americas' single market will stretch from the Bering Strait to Cape Horn, encompassing 34 countries with a total population of 800 million and a combined GDP of almost $12.5 trillion (Business Week, April 23, 2001). This is a big leap towards widening integration. Recently, the African leadership endorsed a plan to launch a continent-based African Economic Union similar to the EU and other emerging economic unions. Economic integration among Africa's 53 countries, with a population of about 850 million and an estimated GDP of $800 billion, is aimed at substantially reducing import tariffs and dismantling non-tariff barriers to trade and investment. It is also planning to create a central bank and common currency for the entire African continent (Financial Times, July 10, 2002). The announcement indicates a framework of deepening and widening integration. Lately even some smaller regions are initiating economic integration agreements. The Caribbean community (Caricom) had announced on July 12, 2001, that it would establish an economic union integrating its 14 member countries, with a cumulative market of 13 million people. The Caribbean Union's goals are to promote trade in services, free movement of capital, progressive dismantling of barriers to trade, and a regime of common tariffs on imports from non-member countries. Future plans also envision establishing a regional court to adjudicate trade disputes and to creating a common currency administered by a regional monetary authority (Financial Times, July 13, 2001). A chronology of other events across the world concerning integration indicates substantial progress both towards deepening and widening. The establishment of a monetary union in Europe, the ongoing negotiations for an Asian Free Trade Area (AFTA), and in July, 1994, creation of the ASEAN Regional Forum (ARF)Ða multilateral security group with regional economic aims that includes China, Russia, the United States and 15 other membersÐall point toward widening and deepening regionalism around the world. Most of these trading blocs are being promoted in the spirit of open regionalism, and to strengthen their respective competitive positions in global markets (Khan, 1996). Parallel developments in the success of the Uruguay Round of the GATT and the initiatives of World Trade Organization (WTO) are proving to be balancing instruments to any threats of inward-looking regionalism, trade retaliation, or indirect protection. How well these institutions will succeed in liberalizing trade, services and investment ¯ows, given the restrictive trade practices of major industrialized nations, particularly of the U.S. and the
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Europeans, is not yet certain. However, these international institutions would serve as strong links in evolving a continent-based integration. The approaches, institutions, and instruments discussed in Sections 1 and 2 are going to have a profound impact on shaping the 21st century world economic order. They will also prove to be the key to guiding the countries into the 21st century and to exploiting the enormous economic potential. 3. South Asian dilemma and potential I have never been free of an intense awareness of the momentous human drama of the desperate striving for national consolidation and economic development in the south Asian countries. Gunnar Myrdal Asian Drama, 1968
Gunnar Mydral's observations sum up the peoples' hopes and worthwhile efforts in South Asia for accelerated development and common prosperity in the whole region. However, the political leadership in most of the South Asian countries is embroiled in disputes and distrust. Consequently, efforts have been stalled to resolve the many diverse problems in the region. The current situation presents a two contrasting world-views: prosperity through economic cooperation versus poverty through confrontation and poses a dilemma which way to decide in the face of disputes and distrust. The South Asian dilemma has created an impasse over determining priorities pertaining to economic cooperation and territorial disputes. So far preoccupation with territory has taken precedence over economics. It appears preoccupation with territorial disputes and bilateral con¯icts have blurred the leaders' vision and hardened their attitudes. Despite peoples' hopes and the region's huge resources and enormous potential, this dilemma continues to hamper efforts towards reconstruction, development, and reducing poverty. Notwithstanding over ®ve decades of development efforts in the South Asian region, negative effects of the impasse are obvious: low economic and social indicators, and underdeveloped and underutilized economic potential. 3.1. Economic indicators Leading economic indicators, such as GDP growth rates, GDP per capita and its growth rates, share in world trade and foreign direct investment (FDI), trade to GDP ratios and factor intensity of exports remain extremely low both in absolute and relative terms. Empirical evidence clearly highlights this problem. The data on economic indicators presented in Table 3 show South Asian countries faring relatively well in achieving respectable growth rates in their GDP. Since the 1970s, the GDP growth rates for these countries show a consistent rise. For example, from the 1970s to 2000 Indian growth rates rose from 3.4% to 6%. Bangladesh growth rate for the same period rose from 2.4% to 4.8%. Their growth rates, however, lag far behind the double-digit rates achieved in China, 7.0% in Malaysia and 5.7% in South Korea. The rates of growth in South Asian countries are
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Table 3 Economic indicators Country
Population growth rate (%)
Average annual growth rate (%; GDP)
Average annual per capita growth rate (%; GNP)
Average Annual (1995±1999) (1999±2015)
1970±1980 1980±1990 1990±2000
1980±1991
South Asia Bangladesh India Nepal Pakistan Sri Lanka
2.4 2.0 2.2 2.8 1.4
1.9 1.3 2.2 2.5 0.8
2.3 3.4 ± 4.9 4.1
4.3 5.8 4.6 6.3 4.0
4.8 6.0 4.8 3.7 5.3
1.6 3.2 2.1 3.2 2.5
3.8 3.9 3.1 3.4 4.2
East Asia/China China Indonesia Malaysia Philippines South Korea
1.3 1.8 2.4 2.4 1.1
0.7 1.1 1.5 1.6 0.5
± 7.2 7.9 6.1 9.6
10.2 6.1 5.3 1.0 9.4
10.3 4.2 7.0 3.3 5.7
7.8 3.9 2.9 1.2 8.7
7.3 3.1 6.0 2.1 7.8
Latin America Argentina Brazil Mexico Peru
1.4 1.8 2.0 2.1
1.1 1.1 1.3 1.5
2.5 8.1 6.3 3.5
0.4 2.7 0.7 0.3
4.3 2.9 3.1 4.7
1.5 0.5 0.5 2.4
1.7 3.2 5.4 1.9
1999±2000
Sources: World Bank (2001), World Development Report 1993, 1995, 1997, 1998, 1999, 2000±2001, Oxford University Press, New York.
comparable to Latin America and other developing countries. But when comparisons are made on the basis of annual per capita income growth rates, with China, Malaysia and South Korea in particular, they have remained disproportionately low in South Asia countries. One reason for this poor performance could be the higher population growth rates in South Asia countries compared with population growth rates in China and East Asia countries but disputes and distrust have played a signi®cant role. South Asian shares in world trade and FDI also raise concerns. They have been consistently the lowest compared to other regions. For example in 1998 and 1999 these shares have been 1.1% and 0.5% compared to East Asia's 12.2% and 3.0% (Table 4). Since 1970, trade to GDP ratios, a direct result of economic reforms and liberalization of trade and investment, have expanded for most developing countries (Table 5). Again, expansion in South Asia is the lowest, which probably is the direct result of the slow pace and half-hearted efforts in adopting economic reforms and liberalization policies. Another interesting indicator is the factor intensity of exports. Data shows that during the 1980s and 1990s the factor content of trade has also changed signi®cantly. The evidence indicated that South Asia, which had produced mainly natural resource intensive commodities during the 1970s and 1980s, began to employ more unskilled labor, which was abundant in South Asian countries. No signi®cant progress seems to have taken place in South Asia in the use of technology and human capital when compared to East Asia and
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Table 4 World trade and FDI shares Region Industrial countriesa East Asia and Paci®c South Asia East Europe and Central Asia Sub-Saharan Africa Latin America and Caribbean
World trade share
FDI share in GDP
1998
1990
1999
72.0 12.2 1.1 5.2 1.3 5.7
1.0 1.6 () () 0.3 0.7
2.0 3.0 0.5 2.9 2.4 4.5
Source: world trade shares. UN Comtrade database. FDI Share: Human Development Report 2001. a Industrial countries 1988 and 1998. Table 5 Trade to GDP ratios Region
1970 (%)
1980 (%)
1990 (%)
1998 (%)
South Asia East Asia and Paci®c Sub-Saharan Africa Latin America and Caribbean
12 13 41 22
18 36 52 27
20 49 50 28
28 66 56 35
Source: World Bank SIMA database.
Latin America, where it has increased rapidly and signi®cantly (Table 6). Sub-optimal use of technology and human capital in the productive process of exports is due to the meager in¯ows of FDI and the high rates of illiteracy existing in South Asia, particularly in India, Bangladesh, Nepal, and Pakistan. 3.2. Social indicators The social indicators for the last three decades presented in Table 7 show that life expectancy gradually rose, infant mortality dropped, and adult illiteracy declined in the Table 6 Factor intensity of exports (1988 and 1998) Region
Natural resource
Unskilled labor
Technology
Human capital
1988
1998
1988
1998
1988
1998
1988
1998
Industrial countries
22.51
17.9
9.8
9.7
39.4
45.2
28.3
27.1
Developing countries East Asia South Asia Latin America Sub-Saharan Africa East Europe and Central Asia
27.2 50.2 67.0 78.3 38.0
16.8 15.9 42.4 79.0 37.6
30.5 35.9 5.8 6.0 23.9
24.0 81.2 9.3 5.9 18.4
23.8 7.9 13.4 6.6 20.2
42.6 2.2 25.4 7.7 21.3
18.5 6.1 13.8 9.1 17.8
16.6 0.6 22.9 7.4 22.7
Source: UN Comtrade and World Bank.
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Table 7 Social indicators Life expectancy (at birth years)
Infant mortality (per 1000 live births)
Adult illiteracy rates (%)
Population below income poverty line (%)
1970
1991
1999
1980
1991
1999
1970
1991
1999
$1 a day (1993 PPP US $) (1983±1999)
National poverty line (1984±1999)
South Asia Bangladesh India Nepal Pakistan Sri Lanka
44 49 42 49 65
51 60 53 59 71
61 66 58 63 73
132 116 190 124 34
111 90 102 101 25
81 71 75 95 17
76 64 87 79 23
65 52 74 65 12
61 47 62 59 9
29 44 38 31 7
36 35 42 34 25
East Asia/China China Indonesia Malaysia Philippines South Korea
62 48 61 57 60
69 60 71 65 70
70 66 72 69 48
42 90 30 52 26
42 68 15 42 22
38 45 10 32 6
± 46 40 17 12
27 18 22 10 4
14 15 14 5 3
18 8 0 ± 2
5 27 15 37 ±
Latin America Argentina Brazil Mexico Peru
66 59 61 54
71 66 70 64
74 67 72 69
35 70 51 81
30 59 37 80
21 37 29 44
7 34 26 29
5 19 ± 15
4 16 10 12
± 9 12 15
± 22 10 49
Sources: World Bank (1999), World Development Report 1993, 1995, 1997, 1998, 1999, Oxford University Press, New York.
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South Asia countries. However, compared with China and with East Asia countries, these improvements are insigni®cant. In South Asian countries, life expectancy is lower, infant mortality is higher, and adult illiteracy is much higher than in China and East Asia and Latin American countries. Population below poverty line in South Asia countries is signi®cantly higher than in China, East Asia, Latin America, and many other developing countries. Even where the South Asia countries had an advantage in the economic ®eld, they fall behind in East Asia, Latin American, and North Africa countries in social improvements. Despite SAARC agenda and outward looking policies, all leading economic and social indicators in South Asia are low both in absolute and relative terms. Fortunately, there is a bright side to this picture: enormous economic potential. 3.3. Economic potential This brings us to a discussion of the impact of South Asia's dilemma on the region's underdeveloped and underutilized economic potential. Its opportunity cost in terms of foregone GDP and suppressed living standards is substantial. For example, cross-country and cross-region data con®rms the wide scope of economic potential and the extent of its underutilization. Cross-country data pertaining to GNP per capita and GNP per capita average annual growth rates for Bangladesh, India, Nepal, Pakistan, and Sri Lanka for 1980 and 2000 are signi®cantly lower than for China, Indonesia, Korea, Malaysia, and Thailand, Table 8. Future prospects show the widening of income gaps, since rates in 2000 for East Asian countries are signi®cantly higher than the South Asian countries. A sharp contrast is obvious between the growing income gap when Pakistan and India are compared to Korea, Malaysia and China. It is interesting to note that in mid-1960s Korea, Malaysia, and China were at a par with India and Pakistan in per capita income bases. In 2000, the per capita income in Korea, Malaysia, and China was 19, 7 and 2 times higher than in India and Pakistan. This Table 8 Per capita GNP Country South Asia Bangladesh India Nepal Pakistan Sri Lanka East Asia China Indonesia Korea Malaysia Thailand
Dollars (1980)
Average annual growth rate (1960±1980)
Rank (1999)
Dollars (2000)
Average annual growth rate (1999±2000)
80 240 140 300 270
0.1 1.4 0.2 2.8 2.4
167 162 194 160 137
380 460 220 470 870
3.8 3.9 3.1 3.4 4.2
290 430 1520 1620 670
4.8 4.0 7.0 4.3 4.7
140 150 51 82 102
840 570 8910 3380 1960
7.3 3.1 7.8 6.0 3.5
Source: World Bank (2001), World Development Report, 1982, 1984, 2000±2001, Oxford University Press, New York.
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gap is further widening with the higher average growth rates found in the East Asian countries. The GDP gap in India and Pakistan in 2000 is shocking. Estimates of income gap are based on using per capita GDP in 1960 and 2000, and population size of 1.2 billion in 2000 in India and Pakistan and comparing it with the economic performance rates in South Korea, Malaysia and China: At South Korean per capita ($8910), the income gap is $11.6 trillion. At Malaysian per capita ($3380), the income gap is $3.9 trillion. At Chinese per capita ($840), the income gap is $600 billion. This low level of economic performance compared with an estimated potential show how far South Asia has fallen short of the level of development it ought to have obtained. Without breaking the long-standing impasses and dilemmas, any strategy including open regionalism to tackling economic issues will remain ineffective. In this regard there are lessons for South Asian leaders to learn. They should seriously examine the existing economic relationships between China and Taiwan, China and Japan, Russia and Japan, and Russia and the U.S.A. Presently and even during the post-Cold War period despite differences on territorial and security matters, they have pursued consistently pragmatic economic strategies. Their disputes have not been allowed to suppress economic relationships or stand in the way of progress. For achieving the objectives of economic development and common prosperity, the South Asian leadership should break the impasse and adopt similar pragmatic approaches so that the economic programs are not left in limbo. This means no more dilemmas in deciding in favor of economic cooperation. Otherwise the risk of falling behind is greater. How to enhance the exploitation of the enormous potential of the regional economy and take advantage of the existing opportunities in the international economy and make open regionalism more effective needs a concrete approach that is outlined in Section 4. 4. Proposed South Asian strategy The principles of good government, the inducements to individual performance, the role of popular enlightenment, the foundations of thrift, the effect of competition and of monopoly, the relation between social classes, the reasons why some people, notably the English, worked hard and others, notably the Irish, were idle, were all grist for their highly diversi®ed mill. Anything that was deemed to have a bearing on economic advance came into the discussion. The only test was broad relevance to the questions: What made for economic progress? Or, on the other hand, what led to stag¯ation- to the much discussed stationary state? John Kenneth Galbraith Economic Development, 1964 The classicists had ``concerned themselves with the aggregate requirement of process.'' From this vantage point, Galbraith sees ``some serious shortcomings in the modern discussion'' of the underdeveloped countries, and states: ``We have given too little attention
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to inquiring whether the things that contribute to economic development are being employed in a context that is favorable to development.'' Gunnar Myrdal Asian Drama, 1968
Galbraith (1964) and Myrdal (1968) argue in favor of an institutional approach, a notion driven by the classical school's intellectual activities. We also advocate institutional changes along with open regionalism for SAARC to accelerate outward-oriented development and harmonize development policies with the forces of economic globalism in South Asia.
The institutional approach is a key to formulating and implementing the economic programs of South Asia and a complement for open regionalism strategies. To address the development challenges in South Asia, our suggestions are highly selective and underscore the signi®cance of the institutional factors:
creation of development-friendly environment shift from geo-political to geo-economic approach good governance marginal productivity-based allocation of resources investment in human capital efficient economic management
Adopting political and economic reforms in South Asia can enhance a developmentfriendly environment. In this discussion, democratic systems, human right issues, political stability, macroeconomic stability, outward-looking strategies, market-oriented business practices, and a comprehensive legal framework are essential. Currently not a single country in the region can claim to have come even close to achieving the benchmarks set in these areas by leading European, North American, and East Asian economies. Democracy is important not just for political stability and moral reasons but also for more fair and effective economic development (UNDP, 2002). Additionally, the ``rules of the game'' require truly entrepreneurial activity and competitiveness in the market. Business leadership should respect and practice principles of risk taking, innovation, and competition. Factors like development and enforcement of the legal framework in accordance with the needs of local economy, such as contracts and bankruptcy laws, are the fundamental condition for creating a friendly
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environment. Moreover, achieving and maintaining macroeconomic stability by implementing effective budgetary and monetary policies are strategies hospitable to investment. A geo-economic approach will promote a dynamic pro®le of open regionalism and strengthen SAARC's economic agenda. For this to happen, a shift from a security-oriented, geo-political framework to a development-oriented, geo-economic strategy is essential (Dutta, 1999).3 De-emphasizing geo-political considerations automatically frees scarce resources (peace dividends in the post-Cold War period) from defense and security spending. These resources can be channelized, according to geo-economic considerations, into civilian sectors, particularly investment in priority development projects. The geo-economic approach has a great potential for accelerating development, increasing common prosperity in the region, and establishing strong economic links with the more productive sectors of the global economy. The aggressive pursuit of geo-political interests in the past has had a negative economic impact. Major South Asian countries like India and Pakistan belonging to opposite camps (India's close association with the Soviet bloc and Pakistan ®rmly in the Western camp) had changed the geo-political landscape of the South Asian region. This divide had far reaching effects on reaching agreements on regional disputes. Geo-political rivalries resulted in hardening of attitudes on both sides. The disputes that might have been resolved through bilateral exchanges or international negotiations took a life of their own and became a never-ending contest. In other words Cold War geo-political climate in the sub-continent have perpetuated territorial disputes justifying huge defense budgets. This expenditure has substantially increased the opportunity-cost of economic development. Good governance would be a development-friendly approach for South Asian countries. Instead they suffer from poor governance that is a formidable impediment to development. There is little evidence that under poor governance economic endeavors would succeed in these countries. The problem is enormous and complicated. Public institutions that provide good governance in South Asian countries are grossly lacking. Legal, political, and economic institutions are generally weak and corrupt. This weakness has limited the scope of business opportunities and promoted monopolies. Corruption is a major factor in undermining the ef®cient functioning of markets in South Asian countries in many ways. For instance, corruption in South Asia has taken the form of a private tax; has become an instrument of blocking entry to markets; has played a key role in subverting the legitimacy of the state; and has served as a vehicle for concentrating wealth in fewer hands. Corruption as a tax has distorted economic choices, and bribes have increased the opportunity cost of investment.4 This practice has not only lowered the levels of economic ef®ciency but has also constrained returns on both public and private investment. By promoting monopoly practices corruption in South Asia has often restricted the entry of ®rms. License Raj is a good example of ®rms paying huge bribes to gain entry into markets. Small and capital-short ®rms have often been blocked out of markets. Corruption has stigmatized the legitimacy of government, speci®cally in Bangladesh, India, and Pakistan. A lack of democracy and absence of its traditions of accountability has only worsened the problems of governance. A glimpse of how democracy is practiced in South Asia is an example. What is democracy anyway?' screams a headline in the New York Times of May 3 over a column by Nicholas Kristof. He opens up: ``If there was a form of government that produced
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autocrats who sponsored terrorism, stole millions of dollars while impoverishing their citizens, shredded public education and health, permitted child bondage, tortured dissidents and tolerated pogroms against minorities then we would all condemn it. Except that in South Asia such a system is called democracy.
Without better governance, extremism is likely to ¯ourish, as is the case in Pakistan. This situation undermines national and international endeavors in achieving effective development. According to the basic principles of marginal productivity, sectors yielding higher returns such as technology and human capital should receive higher allocations. Increased investment is needed in these highly productive sectors. Contrary to this principle, resource use in the South Asian countries is biased in favor of big capital projects and defense expenditure. These are relatively low productivity and low priority sectors. Resources for education, health, and technologies have been inadequate. For example, India and Pakistan have been spending 3% and 6% of GDP on defense during the last ®ve decades (1950s± 1990s), Table 9. Human capitalÐeducation, knowledge, skills, and healthcareÐis a highly productive sector in South Asia, yet in the past ®ve decades it has received only meager investment, Table 9. It is also a critical factor for investment for higher productivity and poverty reduction. If South Asian countries are to achieve faster economic growth, they must increase substantially their investment in human capital. Education in poor countries like India and Pakistan yields high returns as knowledge and skills contribute to productivity in the workplace. As is obvious from the ®gures in Table 10, investments in primary education have the highest yield. Additionally, investment in primary education, compared to investment in physical capital, is known to have higher returns also. Estimates in this area indicate 11% to more than 30% higher returns. Investment in the education of girls can yield even higher returns (Mingat & Winter, 2002). Countries in South Asia must pay special attention to investment in human capital. Ef®cient economic management and pragmatic approaches are essential for a successful outcome of development endeavors. The remarkable successes achieved by China and the Asian Tiger countries of Hong Kong, Singapore, South Korea, and Taiwan strongly support this point. These countries have saved and invested, used abundant resources, particularly labor, and invested in education to increase the productivity of human capital. Their governments have been stable and ef®cient and adopted outward-oriented development policies. They have been business friendly and encouraged their companies to compete, export, and succeed in the world markets. Through a strategy of ef®cient economic management they have become model-developing economies. These are good examples for South Asia countries to pursue. Most contemporary development approaches have tended to ignore institutional changes. Obviously, ``too little attention has been paid to inquiring whether the things that contribute to economic development are being employed in a context that is favorable for development,'' (Myrdal, 1968). This must be changed as we start the 21st century. In order to achieve a successful outcome of continent-based integration in Asia, the ``Asianization of South Asia'' is critical due to its demographic pro®leÐalmost one-fourth
782
HDIa
115 127 87
Countries
India Pakistan China All developing countries High human development countries Medium human development countries Low human development countries
Defense expenditure (as % of GDP)
Defense expenditure (as % of combined education and health spending)
Public expenditure
1990
1960
Health (% of GNP)
Educationb (% of GNP)
1960
1990
1985
1990±1995
0.5 0.3 1.3 1.0 1.2 0.9 0.6
1.3 1.8 2.1 2.0 2.1 2.1 1.5
3.2 3.1 2.3 4.1 4.1 4.2 3.2
3.2 2.7 2.3 3.8 4.1 3.6 ±
2.9 5.7 2.7
1999
2.4 4.4 2.1
68 393 ± 102 67 159 76
1990±1991
65 125 23 63 38 84 66
Source: UNDP (1998), Human Development Report 1998, Oxford University Press, New York. a Human Development Index (HDI) a composite index of achievements in basic human capabilities in three fundamental dimensions: a long and healthy life, knowledge, and decent standard of living. b For India, Pakistan, and China, public expenditure on education is for 1985±1987 and 1995±1997.
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Table 9 Sectoral resource allocation
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783
Table 10 Education yield in low-income countries Education categories
Private return (%)
Social return (%)
Primary schooling Secondary schooling Higher education
26.4 18.5 22.4
20.6 14.1 11.3
Source: Psacharopoulos (2000).
of humankindÐand its huge economic potentialÐknowledge, skills and markets. The combined strategies of open regionalism and institutional changes offer the best hope for the South Asia, in economic development and in becoming an active sub-group of the Asian integration. 5. Conclusions Progress on open regionalism is gaining momentum day by day, and economic globalism, in its present form, will remain a pervasive force in the world economy for quite some time. Consequently, nation-states and trading blocs are ambitiously harmonizing economic policies to promote a productive relationship between their development programs and the forces of economic globalism. The strategies of deepening and widening are popular among them. Moreover, evolving open regionalism into continental-based phenomena would help them achieve countervailing power, which they can use to their advantage. These considerations make it inevitable for open regionalism to grow into a continental integration. Already big and strong regional groupsÐEuropean Union (EU), North American Free Trade Agreement (NAFTA), Asia Paci®c Economic Cooperation (APEC)Ðare enlarging their scope of trade relations and membership. Scholars, researchers, and policy makers are helpful in designing more innovative theoretical and practical models to enhance the economic propensities/potential of regional trading groups. The future direction indeed points to continent-based integration across the world. The European Union (EU) is already a continent-based economic union. The North American Free Trade Agreement (NAFTA) is aiming to create a single market of the Americas (FTAA) by 2005, the Asian Economic Community is emerging as a strong framework for a continent-based integration, and recently African leadership has committed itself to establishing economic union embracing the entire African continent. South Asian countries playing their part must recreate SAARC in the true image of open regionalism. The economic future of South Asia is anchored in an open regionalism of Asian scope. Along with open regionalism, adoption of an institutional approach will ensure a dynamic outward-oriented development in the South Asian countries. The creation of a more development-friendly environment, geo-economic approaches, good governance, the allocation of suf®cient resources for civilian sectors especially social services, and accelerating the development of human capital along with better economics management will evolve a very prosperous 21st century for the South Asian people.
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Notes 1. ``Economic globalism'' in this paper is used for ``globalization.'' Globalization can be used in the context of cultural, social, political, and economic trades. Economic globalism speci®cally focuses on economic affairs only. For example, economic globalism is a process that focuses on the free ¯ow of ideas, goods and services, and capital across the international borders. It accelerates the pace of global integration by increasing cross-country interdependence, intra- and inter-regional trade, and promoting market environment. ``Outward-oriented development'' is economic development driven by open regionalism's activities of inter-regional trade, foreign direct investment, and technology transfer. 2. Some of the alternative models of economic regionalism which are both common and popular are: free trade area, custom union, common market, economic union, and trade preference association. Free Trade Area (FTA): in FTA, trade restrictions among member countries are removed. However, each member retains its own tariff structure against outside countries. Custom Union (CU): a CU is a FTA with common external trade policies among its member countries. Common Market (CM): a CM is a CU that also allows for the free movement of factors of production (resources). Economic Union (EU): an EU is a CM that includes some degree of harmonization of national economic policies of member countries. 3. In a map-of-the-world view and in geo-economic terms, South Asia comes within the fold of Asian Economic integration. As an economic unit South Asia is a regionspeci®c institutionalized cooperation of seven sovereign-state-based economies known as South Asia Association for Regional Cooperation (SAARC)ÐBangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. In 1999, South Asia population was 1329 million and total GDP was $2.7 trillion measured at PPP (World Bank, 2001: World Development Report 2000/2001). It is a region with massive potential, and will be a contributing partner in an Asian Economic Union and the international economy. 4. According to an Asian Development report (Asian Development Bank, 2002), released on August 12, 2002, ``The level of poverty worsened (in Pakistan) from 26 percent of the population falling below the poverty line in 1993 to 32 percent in 1999. ``Poor governance'' was cited as one of the primary causes of poverty in Pakistan, which has seen'' three out of the four last civilian governments. . .dismissed prematurely. . .on charges of corruption.'' References Asian Development Bank. (2002). Poverty in Pakistan: issues, causes and institutional responses. August 12, 2002, Manila. Business Week. (2001, April 23). Betting on free trade. New York: McGraw-Hill. Dutta, M. (1999). Economic regionalization in the Asia-Paci®c. Cheltenham, UK: Edward Edgar. Financial Times. (2001). Single market for Caribbean. July 13, 2000, New York. Financial Times. (2002). African Union. July 10, 2002, New York.
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