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Possible gains from regional cooperation

Published: Tuesday, Dec 14, 2010

Possible gains from regional cooperation

Sadiq Ahmed
Tuesday December 14 2010

South Asia Development Progress and Challenges

The growth path of the South Asia Region (SAR) has improved dramatically since the 1980s. As compared with a miserly 3.7 percent growth per year between 1960 and 1980, average GDP growth climbed to around 6 percent

during 1980-2000 and further accelerated to 7 percent plus during 2000-09. South Asia is now the second fastest growing regional economy in the world (Figure 1). Private investment has boomed, supported by rising national saving rates. It now attracts global attention because of rapid growth, global outsourcing, and skill intensive service exports. South Asian economies also demonstrate resilience to external shocks. For example, South Asia has weathered the global financial crisis much better than most other regions. As a result, the downturn in South Asia’s average growth rate was much less severe and the recovery has been faster than in other regions.


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Rapid growth has been instrumental in reducing poverty in South Asia. Poverty has come down sharply in all countries (Figure 2). Progress has also been made in improving human development and the social indicators compare favorably with countries in other regions with similar income levels.

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The Poverty Challenge: While there is much to celebrate the achievements in South Asia, there are a number of major concerns. First, notwithstanding past progress, poverty remains a major challenge in South Asia. For example, using a PPP adjusted $1.25 a day measure of poverty the World Bank estimates South Asia’s headcount poverty rate at 40.3 percent for 2005 (Figure 3). This is the second highest rate after Sub-Saharan Africa (50.3 percent). In terms of the number of people who are poor in South Asia as of 2009, this amounts to some 641 million as compared with 425 million in Sub-Saharan Africa.


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The Challenge of Lagging Regions: A second problem is the large disparity in living standards in South Asia. As a result of this disparity, there are two faces of South Asia. One face is that of a thriving urban economy with high standards of living and functioning in a globally competitive environment. The other face is that of a slow growing rural economy that is full of poverty and is embroiled in serious conflict. Indeed parts of South Asia are infected with conflicts that globally are amongst the most serious and threaten global peace.

There are two dimensions of this dichotomy: disparities between countries and disparities within countries. Figure 4 shows per capita income in US Dollar terms in the eight South Asian countries. The large variations in per capita income suggest the large inter-country disparities in living standards. Even ignoring the small economies of Bhutan and Maldives, the per capita income gaps are large. Per capita GDP in Afghanistan, Bangladesh, Nepal and Pakistan are substantially lower than that in India and Sri Lanka.

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The income gaps at the national level carry through at the sub-national level.   During the periods 1993-2004, GDP in the leading states in India grew at twice the rate compared to the lagging states. The average annual growth rate for the leading states (Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu, and West Bengal) was 5.9 percent. The average growth rate for the lagging states (Bihar, Madhya Pradesh, Orissa, Rajasthan, and Uttar Pradesh) was 3.0 percent per annum. In Sri Lanka, the leading regions grew at an annual average rate of 6.5 percent during the periods 1996-2005, while the lagging regions (Sabaragamua, Central, Uva, and North Western) grew at an average rate of 1.5 percent per annum. In Pakistan, the difference in the growth rates between the leading and lagging regions is less striking. The leading regions of Punjab and Sindh experienced an average annual growth rate of 2.3 percent during the periods 1991-2000, while the lagging regions of Baluchistan and NWFP grew at an average annual rate of 1.8 percent. In Bangladesh, the leading regions (Dhaka, Chittagong, and Sylhet) grew at an annual average rate of 5.2 percent annum while the lagging regions (Barisal, Rajshahi, Khulna) grew at an average annual rate of 4.2 percent during 1992-99. Nepal’s growth since 2000 has averaged a paltry 3%, around half of the South Asian regional average and much of the growth has concentrated in the Kathmandu valley. Conflict, poor road connectivity, and urban bias associated with earlier growth spurts have resulted in a clear divide between Nepal’s lagging regions and Kathmandu.

Regional disparities are not uncommon in other parts of the world. Yet, the income gap between the leading and lagging regions in South Asia is much larger compared to the spatial disparities in developed countries. In India, GDP per head in the state where it is highest (Haryana) is 5 times greater than in the state where it is lowest (Bihar). In the USA, the difference is only 2.5 times, and in Japan only two times.

Given the strong negative relationship between income and poverty globally and in South Asia, it is hardly surprising that with few exceptions, most lagging regions also show higher than average rates of poverty. Nearly 60 percent of the poor in India live in the lagging states. Every seventh poor Indian lives in Bihar, a lagging state. Sri Lanka shows disturbing regional disparity in poverty rates between the Western region (a leading region) and the rest of the country. Nepal’s Western region (lagging region) has a substantially higher poverty incidence than the more prosperous Kathmandu valley. In Pakistan, inter-provincial disparities in poverty incidence between the leading regions (Sindh and Punjab) and the lagging regions (NWFP and Balochistan) are huge. In Bangladesh, the lagging regions of Barisal, Rajshahi and Khulna have a much higher poverty incidence than in the more prosperous Dhaka and Chittagong Divisions.

The Conflict Challenge: A third problem is the large and frequent incidence of conflict. Throughout its turbulent history South Asia has witnessed a serious and recurring series of conflicts with heavy social and economic costs. These conflicts can broadly be classified under three groups: cross-regional; intra-regional; and in-country (Table 1). Much of the conflicts are in the border areas involving neighbors. This is not accidental. Conflicts involve long-standing territorial disputes, sharing of common natural resources (water), and religious, language or ethnic disputes. Another dimension is cross-border mobility of people seeking better economic opportunities on the other side of the border.

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While the conflicts have varying elements of religious, ethnic and other social dimensions, irrespective of the source, internal and external conflicts are inter-linked. Important examples are:

  • Afghanistan-Pakistan conflict (Pashtun ethnicity spillover in internal Pakistan conflict);
  • India-Pakistan conflict (religious divide spilling over in internal conflicts in both countries)
  • India-Sri Lanka conflict (Tamil ethnicity spillover in Sri Lanka internal conflict)
  • Bangladesh-India conflict (religious divide at least on the surface contributing to internal political divide)
  • Nepal-India conflict (Nepali Pahadi (hilly areas) ethnic conflict with Madhesi Nepalis of Bihar origin in the terai region)

On the surface conflicts appear as related to language, ethnic or religious divide. Looking at the root causes, the conflicts are economic in nature. Important examples are:

  1. Afghanistan-Pakistan conflict is rooted in a belief that NWFP and Baluchistan areas in Pakistan are neglected and left out, combined with the inflow of Afghan population seeking better economic opportunities.
  2. Pakistan-India conflict over Kashmir is linked substantially to who controls the rich water and other natural resource base. At the same time, Kashmiris feel left out of the development process on both sides of the border.
  3. Sri-Lanka-India conflict originates from Sri Lanka’s Tamil population getting alienated and perceives being discriminated against in economic and social opportunities.
  4. Bangladesh-India conflict is fanned by a combination of parts of population in the North-eastern states of India feeling by-passed by India’s development and migration from Bangladesh’s border districts into India seeking better economic opportunities.
  5. Nepal-India conflict is rooted in deep-seated perception that Nepal is not getting a good deal from its various cooperation agreements with India and restrictions on Nepal’s access to other neighboring countries.
  6. Bhutan-Nepal conflict is linked to the ouster of Bhutanese inhabitants of Nepali origin from Bhutan and Nepal’s refusal to take them back, causing these people to be restricted to refugee camps in Nepal.

Conflict, Lagging Regions and Poverty

At the macroeconomic level, these economic conflicts are broadly correlated with South Asia’s lagging regions problem. These lagging regions, most of which are also beset with serious conflict, are either land-locked countries (Afghanistan and Nepal) or are border districts/states/provinces of Bangladesh, India, Pakistan and Sri Lanka. This is illustrated in Map 1 that shows the following results.

  • The landlocked countries of both Afghanistan and Nepal are among the lowest per capita income group in the region.       Both are afflicted with serious conflict.
  • Out of 14 states of India that have borders with neighbors, 12 have per capita income levels that are at or below the national average (Arunachal Pradesh, Assam, Meghalaya, Mizoram, Nagaland, Tripura, Manipur, West Bengal, Bihar, Uttar Pradesh, Jammu and Kashmir, and Rajasthan). The only exceptions are Punjab and Gujarat. The 7 sisters of Eastern India, Bihar, UP, and Jammu and Kashmir are also conflict prone regions of India.
  • In Pakistan, per capita income is lower than average in the border provinces of North-West Frontier, Balochistan, rural Sindh and the Kashmir part of Pakistan. As in the case of India, Pakistan’s Punjab is an exception. Similarly, urban Sindh is richer than the national average because of the dominance of the port city of Karachi. These border areas are hotbeds of serious regional conflicts.
  • In Bangladesh, the border districts tend to have lower than average per capita income. The border districts of Bangladesh on the Eastern side of India (the 7 sisters) are a part of the conflict region with India.

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  • Sri Lanka’s conflict-prone Jaffna region is also a border area with India’s Tamil Nadu State and it is amongst the poorest region in Sri Lanka.
  • Most lagging regions in income terms are also lagging in terms of having higher than average incidence of poverty and/or poorer human development indicators.

Detailed analysis of these lagging regions indicate the following socio-economic characteristics

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

A review of history suggests that not all areas were lagging and poor for all the time. For example both Afghanistan and Nepal prospered in the 18th and 19th centuries on the basis of free trade and commerce with neighbors including Central Asia, Middle East, Indian sub-continent and China. Over the years, conflict and border restrictions removed this key source of growth. Another example is that of North-East India (the so-called 7 sisters). The partition of Indian sub-continent into Pakistan and India brought havoc to the economies of these seven sisters, especially the booming state of Assam, by cutting off their sea-access and sharply raising the transport distance with the rest of India. The Kashmir valley was a prosperous and peaceful tourist resort until conflict between Pakistan and India took its toll. The Federally Administered Territories of Pakistan (FATA) and the NWFP were similarly prosperous and peaceful trading outposts until regional and global conflicts converted many parts of these border areas into conflict prone, security risk regions with low per capita incomes, high incidence of poverty and low human indicators.

Apart from being poor, the lagging regions also share a number of common vulnerabilities. First and foremost is the vulnerability to natural disasters.   South Asia has lost a significant amount of its GDP because of natural disasters. This loss has been especially significant for Maldives, Bangladesh, Sri Lanka and Pakistan. The impact of natural disaster is particularly strong in South Asia because of its high population density. The losses are typically not insured in the financial market. It is the poor who are adversely affected by disasters.

A second and related vulnerability is the access to water for irrigation and transport. An estimated 500 million people, many of whom are poor, directly or indirectly depend on the water flows of the three mighty rivers of Indus-Ganges-Brahmaputra for their livelihood. Frequent water shortages and floods create serious challenges to maintaining the income level of these large numbers of poor.

A third vulnerability is exposure to climate change. The adverse effects of climate change on weather pattern, natural disasters such as flooding, and rising sea level have serious implications for the poor who are much more exposed and less well equipped to cope with climate change effects.

Politics and Conflict: Who Gains From Conflict

It is clear that conflict and poverty are correlated. There is also a vicious reinforcing mechanism: poverty fans conflict and conflict worsens poverty and human deprivation. Conflict has a tendency to be self-sustaining, especially if this conflict is low-intensity and provides a convenient political forum. Conflict hurts poverty, yet it prevails over a long period of time. So somebody must gain from conflicts. Who gains?   There are indeed several special interest groups who benefit from conflict.

  1. Military: higher defense budget and strong voice in civil administration
  2. Politicians: Anti-neighbor stance often helps drum political support at home
  3. Business: Trade and investment barriers help protect inefficient enterprises
  4. Rent seekers: Trade barriers support a flourishing illegal trade with huge financial gains

Collectively, they can be a powerful lobby for status quo. Some specific examples will illustrate these points.

 

—  Kashmir conflict underpins large defense budgets in Pakistan, an estimated 5% of GDP per annum that is almost twice that of public expenditure on health and education. Additionally, owing to conflict with India, the Pakistan military has an exceptionally strong voice in national administration.

—  Kashmir conflict is also a rallying point for major political parties in both Pakistan and India.

—  Anti-India sentiments have drummed up support for major political parties in Bangladesh and Nepal.

—  Reduction of trade and investment barriers with India is opposed by a large segment of local enterprises in Bangladesh and Pakistan owing to the fear that Indian enterprises might out-compete local enterprises.

—  Illegal trade flourishes in Afghanistan, Bangladesh, India and Pakistan with huge losses for the Treasury but large gains for the smugglers.

—  Large number of studies has shown that illegal trade between Pakistan and India far exceeds legal trade.

Status quo will not be easy to break. What is the way out? At the national level, strong leadership from the top can break this cycle. Public opinion based on informed analysis, debate and discussions can also help. At the multilateral level support from regional organizations such as the SAARC can play a positive role. The UN organizations and OECD country leaderships may also be able to help out in breaking this vicious cycle.

Regional Cooperation for Conflict and Poverty Reduction

In addition to enabling national policies, regional cooperation can be instrumental for raising growth in the border regions, thereby reducing the gap between leading and lagging regions. Better regional cooperation can help accelerate growth and reduce poverty by supporting market integration, by strengthening connectivity, drawing on the geography and density aspects of South Asia, and by helping achieve energy security. Better cooperation can also sharply reduce vulnerabilities for South Asia’s poor through sustainable solutions to food security, water management and climate change. Benefits of cooperation in terms of income gains, lower poverty rates and reduced vulnerability can be a powerful and sustainable instrument for breaking political gridlocks and reducing conflict.

 

Supporting Market Integration: Market integration allows economic agents to interact across spatial scales: local, regional, and international. The extent to which economic agents take advantage of market integration is impacted positively by density, but negatively by both distance and division. A high level of economic density implies “thick markets” in the exchange of goods and services, as well as in the informal exchange of ideas. This creates productivity advantages for firms and welfare advantages for workers. By contrast, a high level of distance to density denies economic agents the opportunity to access these markets with consequent negative impacts on poverty and well-being. Likewise, divisions, created by conflict, transport costs and both formal and informal barriers to trade, separate economic agents in one country from the advantages of density in other countries. By reducing distance and division, market integration, both within and between countries, brings economic agents in lagging regions closer to the density of leading regions, promoting positive spillover effects which enhance spatial multipliers. Given that South Asia is the most densely populated region in the world, it is well placed to bring areas close to the market and bolster the value of the spatial multiplier. Market integration (global, regional, and within country) can ignite growth, as countries benefit from increased demand, agglomeration and scale economies, improved factor mobility, and the free flow of ideas and technology. Market integration can pull weak countries towards income levels that they would be unable to achieve in isolation. Land locked countries, in particular, (Afghanistan, Nepal) can benefit from cross-country growth spillovers and neighborhood effects. Neighboring countries can provide mutually beneficial economic linkages, spillovers, and complementarities that allow groups of countries to increase their incomes.

The region has significantly more room to benefit from market integration globally, across countries within South Asia, and within country. Globally, South Asia’s rapid GDP growth benefited from rapid expansion in trade. Yet, the region has more room to benefit from trade. Despite recent reforms, South Asia continues to have the most restrictive tariff policies compared to other regions (Figure 5).

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Within South Asia, market integration is the lowest in the world as reflected by official intraregional trade between countries being less than 2 percent of GDP for South Asia compared to 40 percent for East Asia. Border barriers to trade and services have mostly disappeared in the rest of the world but not in South Asia. Divisions across countries in South Asia have increased dramatically over the last four decades. In 1948, South Asia’s share of intra-regional trade as a share of total trade was 18 percent. In 2000-2007, it fell to 5 percent of total trade. Cost of trading across borders in South Asia is high. At the Petrapole-Benapole, one of the main borders between Bangladesh and India, trucks wait for more than 100 hours to cross the border. It takes 200 signatures in Nepal to trade goods with India, and some 140 signatures in India to trade goods with Nepal. It is estimated that trade between India and Pakistan, currently at US$1 billion, could jump to US$6 to 10 billion, if divisions were removed. Divisions in South Asia have been aggravated by conflict.

The geographical configurations of South Asia contain huge agglomeration potential to propel growth. East Asia is an example of a region with a high level of intra-regional trade and intra-industry trade that enabled firms to internalize externalities arising from agglomeration. Firms exporting to the regional markets in South Asia are more constrained by the quality of connectivity and productivity enhancing infrastructure. It is the seamless interaction of improved trade, better connectivity, and converging institutions that can accelerate growth in the lagging regions, and benefit the slower growing and smaller land locked regions and countries. In Latin America, Brazil’s growth creates export opportunities for Bolivia. In Africa, resource landlocked countries piggy-backed on the growth of Kenya. In East Asia, Thailand is an important market for Laos and Cambodia.

Growth benefits of market integration are likely to be more important for the smaller economies. India, a large country, with a big home market, can get by with more restrictive borders, since the size of its economy and population provides the incentive to importers and exporters to overcome these barriers. It is the small, land locked countries, like Afghanistan, Bhutan, and Nepal, which will benefit most from improved access to the markets of others. Small countries depend more on openness to overcome the disadvantage of size: small population, small markets, and inability to take advantage of agglomeration and scale economies. Even within India, the peculiar geography that isolates the seven North-Eastern states (the so-called 7 sisters) from mainland India with the location of Bangladesh in-between suggests that market integration requires trade and transit arrangements with neighbors to benefit all regions that are lagging and isolated from the growth centers. Tradable economic activities are inherently scalable in the sense that small economies can expand output without running into diminishing returns (unlike domestic services).

Strengthening Connectivity: A solid system of transport network and easy cross-country transit arrangements that enhances physical connectivity and contributes to market integration is the best solution to promoting growth as well addressing rising inequality between regions. The Ganga Bridge in Bihar in India is a good example of second-nature geography. The bridge has reduced the time and monetary costs of farmers in the rural areas in north Bihar to reach markets in Patna, the largest city in Bihar. The Jamuna Bridge in Bangladesh is another good example of spatially connective infrastructure. The bridge has opened market access for producers in the lagging Northwest areas around the Rajshahi division. Better market access has helped farmers diversify into high value crops and reduced input prices.

 

So far, South Asia has achieved impressive growth rates despite relatively poor infrastructure. This may be difficult to sustain in the future. Poor infrastructure is a key factor that has restrained the growth of manufacturing sector and prevented firms from growing. The service sector in South Asia, led by India, has done well because it relies less on transportation and is less energy intensive than manufacturing. South Asia has the highest share of services in its exports at 31 percent, which is higher than OECD high income countries. ICT exports and global outsourcing have benefited from the use of the internet which has reduced information transmission costs dramatically. While other countries can emulate India’s successful efforts to boost services export, sustained high growth will require a substantial effort to raise manufacturing growth in all South Asian countries.

South Asia suffers from three infrastructure deficits. First, there is a service deficit, as the region’s infrastructure has not been able to keep pace with a growing economy and population. Power outages and water shortages are a regular occurrence in India and Bangladesh. Rural roads are impassable in lagging regions in India (e.g., Bihar, Uttar Pradesh) and Sri Lanka. India has 6000 km of four lane highways and China in the last 10 years has built 35,000 km of four to six lane highways. Every month, China adds power capacity equivalent to what exists in Bangladesh. Second, South Asia suffers from a policy deficit, given highly distorted pricing, poor sector governance and accountability, and weak cost recovery. It is estimated that eliminating the financial losses from the power and water sectors alone would provide a substantial chunk of the incremental funds for infrastructure investment that India needs. Third, South Asia suffers from a cooperation deficit. India, one of the energy thirstiest nations sits next to an immensely energy rich neighbor, Nepal. Yet there is very little use of Nepal’s hydropower potential because of inadequate cooperation with India and other neighbors. Similarly, India, which has attracted global attention in ICT, contrasts with other South Asian countries that are lagging in ICT. In South Asia, only 7 percent of the international calls are regional compared to 71 percent in East Asia.

South Asia needs to overcome a huge gap in infrastructure. It has invested only 3-4 percent of GDP per year in infrastructure over the period 2000-05. This is lower than what the East Asian countries have invested: Vietnam and China invested around 8-10 percent of GDP. In 1980, India actually had higher infrastructure stocks—in power, roads and telecommunications—but China invested massively in infrastructure, overtaking India by 1990 and the gap is currently widening. It is estimated that for the South Asia region to sustain a growth target of 8 percent, it will require an investment in infrastructure amounting to 8 percent of GDP per year. Higher growth rate in the 10 percent range will require an even more rapid pace of investment to modernize the infrastructure.

Much of the infrastructure investment gap has to be financed at the national level along with necessary improvements in sector policies and institutions. Yet regional cooperation can be of great help to meet a significant part of this need. The three priority areas for regional cooperation include telecoms and internet, transport and energy. A regional telecom network and a high-bandwidth, high-speed internet-based network could help improve education, innovation, and health by facilitating better flow of ideas, technology, investments, goods and services. It would facilitate greater interactions between knowledge workers in areas such as high-energy physics, nanotechnology and medical research. There are untapped positive synergies at the regional level that would come from information sharing and competition in ideas among universities, non-university research and teaching entities, libraries, hospitals, and other knowledge institutions. It also could help in the building and sharing of regional databases, and in addressing regional problems, including multi-country initiatives such as flood control, disaster management, climate change, and infectious disease control. Importantly, such an effort could help spark higher and more sustainable regional growth.

Regional cooperation in telecoms and the internet could strengthen the competitiveness of South Asia in the services-export sector. India has established itself as a global player in ICT and outsourcing. Other countries in South Asia could potentially benefit from neighborhood and spillover effects. The expansion of services exports would contribute to growth, create jobs, and other sectors would benefit from improved technology and management. The service-export sector, although less infrastructure intensive than manufacturing, needs different types of infrastructure than the traditional export sectors. For these exports, there would be a need to invest in fiber optic highways, broad band connectivity, and international gateways and uplink facilities. Investments in tertiary education and in technical and English proficiency would need to be increased. South Asia would need to remove barriers to trade in ICT services, eliminate restrictions on the flow of intraregional FDI, and remove visa restrictions on the flow of people.

Restrictions in transport border crossings are a major constraint to global and intra-regional trade in South Asia. Removing these restrictions would boost trade within South Asia as well as lower cost for international trade in general as many land-locked countries and regions will benefit from access to the closest ports. Currently, the efforts at improving trade facilitation and transport networks are being done in a fragmented manner and with little cooperation even where cross-border issue are involved. Establishing corridor-based approaches for improving the trade – transport arrangement for intra-regional trade would be essential for improving the efficiency of regional transport and for reducing trade costs. The recent initiative between Bangladesh and India to allow transit trade via rail and land routes is a welcome initiative. However, implementation remains a challenge.

Better Energy Security: Energy shortage has now become a binding constraint on growth in South Asia. South Asia is a net importer of primary fuel. With rising fuel costs, the burden on the economies has been substantial. Yet, collectively, South Asia has enough natural resources to adequately meet its energy requirements through intra-regional energy trade. This is best seen by looking at Map 2 that shows South Asia’s potential sources of hydro-power (blue) and its demand (gold). The Map tells a powerful story. Afghanistan and Nepal are sitting on water resources that could potentially generate some 24000 MW of electricity from Afghanistan and an estimated 83,000 MW from Nepal. These together account for 40 percent of South Asia’s presently installed capacity. Bangladesh, India, and Pakistan are all power deficit countries, especially India. The growing electricity constraint is threatening the ability to sustain rapid growth. Yet, less than one percent of this potential has been used so far. The reason is lack of cooperation and absence of energy trade among South Asian countries. Indeed, if one were to imagine South Asia without borders, perhaps the highest priority investment would have gone to develop the hydro-power resources. While all countries would benefit from the development of South Asia’s hydro-power resources, Afghanistan and Nepal, the two poorest South Asian countries, would benefit most.

After decades of insignificant cross-country electricity trade and the absence of any trade in natural gas through pipelines, regional political leaders and businessmen have recently evinced a great deal of interest and enthusiasm in cross-border electricity and gas trade, not only within South Asia but also with its neighbors in the west (Central Asia and Iran) and in the east (Myanmar). There are two regional energy clusters in South Asia. The Eastern market includes India, Bangladesh, Bhutan, Nepal, and Sri Lanka, extending to Myanmar, and the Western market includes Pakistan, Afghanistan and India, extending to Central Asia and Iran. India bridges the two clusters. A number of activities are underway in the Eastern market including a very successful hydro-power trade between Bhutan and India, electricity trade between India and Nepal, and electricity grid connection between India and Bangladesh. Activities in the Western market are less developed, although an ongoing project if successfully implemented will bring electricity from Tajikistan and Kyrgyzstan to Afghanistan and Pakistan.

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What can governments do to promote energy trade? They need to consider energy trade as enhancement of energy security and political and economic cooperation; continue energy sector reforms; improve commercial performance of the utilities; improve the credibility, competence, and accountability of regulation; adopt sustainable (cost-reflective) tariffs and a social protection framework; promote commercial approach to energy trade; encourage private sector participation in the form of public-private-partnership (PPP) structures in cross-border investments; help the transit countries—especially Afghanistan—integrate; engage in reaching water sharing agreements; seek accession to international agreements (such as Energy Charter Treaty); strengthen regional institutions at both political and technical levels; and identify priority trade-oriented investment projects and pursue their implementation. The success of India-Bhutan electricity trade should offer useful lessons to other countries.

 

Helping Food Security: The large magnitude of the terms of trade shock during 2006-08 along with the acceleration of food prices, especially wheat and rice, imposed a tremendous burden on South Asian countries. The burden was particularly large on the low income economies of Afghanistan, Bangladesh and Nepal. South Asian governments responded in varying degrees to contain the rise in prices as well as to mitigate the adverse effects on the poor. Yet, the negative impact was substantial. While the subsequent decline in food and fuel prices are a welcome development, food prices have been climbing in 2010.

Policies taken by the governments in the first round were aimed at stabilizing food prices. Some of the policies like trade bans, price controls and subsidies may have been justifiable as short-term response on political economy grounds, but they have adverse implications for efficiency and resource allocation over the longer term. As well, the fiscal space is scarce and the magnitudes of the subsidies entailed are not likely to be sustainable. Finally, the longer term agenda of addressing the supply side aspects of the food security challenge remains to be fully tackled.

At the heart of South Asia’s inadequate supply response is the challenge of farm productivity. Policy attention now needs to shift towards efforts to increase farm productivity, improve rural infrastructure, and lower the vulnerability of the poor. In this regard, the increase in food crop prices provides a golden opportunity to policy makers to re-examine the complex system of input-output pricing interventions, let farmers enjoy international prices for their produce, reduce spending on input subsidies and instead refocus public spending on areas that will raise farm productivity (irrigation, rural roads, and rural electricity). Public policy also needs to move towards reducing the vulnerabilities resulting from climate change and inadequate attention to cross-boundary water management.

 

The scope for productivity improvements can be seen from the productivity comparisons of the two major food crops, wheat and rice (Figures 6 and 7).   Focusing on land productivity is particularly important in South Asia where land endowment is likely to emerge as a binding constraint.

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Regarding wheat, the two major South Asian wheat producing countries (India and Pakistan) achieved substantial gains in wheat productivity between 1970 and 2000, but have faced stagnation since then. Productivity improvements and yield per hectare compare positively with North America but yield remains way behind EEC countries and East Asia. For example, the present productivity gap in wheat per hectare is 50 percent with East Asia and 70 percent with EEC.   Concerning rice, South Asian countries show significant gains since 1970, especially in Bangladesh and Sri Lanka. Yet the productivity gap with most of the world (except Sub-Saharan Africa) is large. For example the average per hectare yield in the better performing South Asian countries of Sri Lanka and Bangladesh (around 3.7 MT/Ha) is still 80 percent lower than the yield in North Africa ( 7.0 MT/Ha), 60 percent lower than North America, and 30 percent lower than in East Asia ( 5.5 MT/Ha). The gaps are even larger for India, Pakistan and Nepal.

The large yield gaps in South Asia suggest the need to find ways to catch up with the performance in the high-yielding countries. This entails addressing issues relating to technology, inputs (especially water, fertilizer and energy), pest control and farmer incentives. The range of policies that impact on productivity include incentive policies for farmers (pricing policies, ownership and tenancy issues, farm credit, crop insurance and public expenditure) and the need to ensure the availability of key inputs in adequate quantity and on time. The rising cost of energy, the emerging water shortages, and the frequency of natural disasters especially from flooding and drought, suggest also the need to pay attention to global public goods such as climate change, cross-boundary water sharing arrangements and regional energy trade. More and better regional cooperation can be an effective way to manage the farm productivity challenge and ought to be a key element in the design of future food policy strategies in South Asia.

A major factor underlying South Asia’s low farm productivity is the relatively poor rural infrastructure. While South Asia has made progress with improving irrigation facilities for agriculture, the coverage of irrigated agriculture still remains relatively low (39 percent). More importantly the availability of water is a serious issue (Table 2), except for Nepal which has surplus water resources. Similarly, the rural population’s access to roads and electricity is a serious handicap to farm productivity and incomes. Evidence from international experiences as well as from South Asia demonstrates the high rate of return from investments in rural infrastructure.


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Regional cooperation can help raise farm productivity by easing energy and water constraints. Better energy cooperation along the lines discussed above can be instrumental in ensuring assured supply of power to agriculture for water as well as for the availability of fertilizers. Furthermore, this can ease the power constraint in rural areas.

Water availability and flooding are a huge challenge for farm productivity and incomes. Given the geography of South Asia, where all waters originate from the mountains along the Himalayan range, better water cooperation with the upstream countries of Afghanistan, China, Nepal, Bhutan and India are essential to support the long-term availability of water and for flood control in the downstream countries and regions of India. Water cooperation issues are discussed in some more detail below.

 

Ensuring Water Security: The quantity and quality of available water are of critical importance for the welfare of South Asia’s population. As we saw in Table 2 above, the availability of water is a serious challenge for South Asia. Access to clean drinking water is a major problem; access to irrigation water is also a challenge for all South Asian countries. Countries that are most seriously threatened by water crisis and are already in conflict over water sharing include Afghanistan, Bangladesh, India and Pakistan.  

 

The water conflict issues along the North Western borders of South Asia relate to: Afghanistan and its Central Asian neighbors; Afghanistan and Pakistan; and India and Pakistan. In Afghanistan, which is the poorest and most conflict ridden South Asian country, the livelihoods of some 80% of the population are based on agriculture and related occupations. Despite being the upper riparian for 5 water basins, Afghanistan suffers from a major water crisis. The Amu Darya basin accounts for about 40% of Afghanistan’s irrigated lands. A combination of conflict and poor management has further damaged the outdated and poorly constructed irrigation canals. In the South and Eastern parts of Afghanistan, droughts and dry years have substantially reduced cultivated areas. The four nations sharing the Amu Darya, Afghanistan, Tajikistan, Turkmenistan and Uzbekistan appear to have conflicting interests in terms of water sharing. As a result, the proper development of the river basin that could benefit all parties has not happened. Afghanistan has a similar problem on the east in regards to sharing of the Kabul river water with Pakistan.

In Pakistan and India, extensive irrigation has put the Indus river water resources under heavy stress, with about 90% of the available flow utilized. Ground water levels are under pressure from extensive pumping. There are serious concerns that Pakistan and parts of India will likely face severe water shortages unless adequate mitigating measures are taken. Rising water demand in these countries is adding to trans-border conflicts as well as internal conflicts.

The water issues in the North Eastern borders involve the South Asian countries of India, Bangladesh and Nepal and the East Asian country of China. Two river basins are involved: the Ganges river basin (India, Bangladesh and Nepal) and the Brahmaputra river basin (China, India and Bangladesh). China and Nepal are the upper riparian; India is in the middle; and Bangladesh is at lowest end where these two mighty rivers meet and merge with the Bay of Bengal. Not surprisingly, Bangladesh is the most disadvantaged and has much at stake. Issues concern both water shortages in winter and also severe flooding risks during monsoon. These problems are increasingly getting exacerbated by the adverse effects of climate change. Parts of India are also at serious risk from both factors. The flooding problems in Bihar and the adverse effects on poverty are an example of these concerns.

South Asia’s poor generally would probably gain most from regional cooperation in water. Cross-border cooperation on water between among India, Bangladesh, and Nepal offers the only long-term solution to flood mitigation. The benefits of cooperation are clear. For example, watershed management and storage on Ganges tributaries in Nepal could generate hydropower and irrigation benefits in Nepal and flood mitigation benefits in Nepal, India (U.P., Bihar) and Bangladesh; water storage in northeast India could provide hydropower and flood benefits in India and Bangladesh; and both would also provide increased and reliable dry season flows. There is an emerging and promising opportunity on the specific cooperation between India, Nepal, and Bangladesh on the Ganges. The other specific river basin idea concerns water cooperation between China, India and Bangladesh on the Brahmaputra River. This can similarly be multi-purpose with benefits in terms of water storage for better sharing in lean periods; reduced incidence of flooding, and sharing of hydro-electricity. Both the Ganges and Brahmaputra Water Basin Management Projects are of critical importance for South Asia with immense long-term benefits for the poor. Only a cooperative solution will work.

There are similar benefits of water cooperation between India and Pakistan; between Pakistan and Afghanistan; and between Afghanistan and Central Asian neighbors. The success of the Indus Water Treaty between Pakistan and India has already demonstrated that cooperation that benefits people can withstand all political obstacles. The Treaty also provides a model for how future cooperation might proceed. Building on this success, other water disputes and potential water markets could be developed through a cooperative solution. As noted, Afghanistan sits on the upper riparian of some 5 water basins that have huge potential for irrigation and hydro-power benefits which could well transform Afghanistan’s economy. Yet, very little of the critical investments required to transform this natural resource into a productive asset for the benefit of the people of Afghanistan have happened so far. As a result Afghanistan is a severely water constrained economy with also a serious power shortage. A key constraint is the lack of a framework for water sharing agreements with neighbors. A specific project that appears of very high priority is the Kabul River Water Basin Project that will yield substantial hydro-power and irrigation benefits for both Afghanistan and Pakistan. A key requirement fore this project to move forward is riparian agreement between Afghanistan and Pakistan. Similarly a proper water sharing framework on the Amu River Basin between Afghanistan and its Central Asian neighbors would provide a basis for water cooperation with multiple benefits. Clearly a cooperative solution will be a win-win for all.

Helping Manage Climate Change: Arguably, few regions globally are more at risk from the adverse impact of climate change on the poor than South Asia. The possible consequences could include:

  • Melting glaciers on the Himalayan-Hindu Kush mountain range. According to Oxford University climatologist Mark New, over the past 30 years snow cover and ice cover may have been reduced by 30 percent in the eastern Himalayas. There is now a real risk that these glaciers might disappear altogether in the coming decades.
  • The rapid melting of glaciers is initially expected to contribute to excessive water flow and flooding in the region. Eventually, the full loss of glaciers, if it happens, would have a severe affect on the availability of fresh water to the 3 mighty rivers of Indus, Ganges and Brahmaputra (and other smaller tributaries); these rivers are the life line for an estimated 500 million people in India, Pakistan and Bangladesh who are dependent on water from these rivers. Much of this population is very poor.
  • The associated loss of farm production, water for human needs, fisheries, river transport, and livelihood will be devastating.
  • Water loss would also reduce the availability of power, which is already a serious development constraint in South Asia.
  • Changing climate patterns are lowering rainfall in arid and semi-arid zones and intensifying floods in other areas.
  • The coastal population in South Asia is already facing a serious flooding problem from rising sea level due to climate change. Even under conservative assumptions, the sea level could rise to 40 cm higher than the present level by the end of the 21st century and submerge a huge area of the South Asian coastal belt. Over 70 million people living along the coastal belt will be forced to relocate causing tremendous human miseries. The threat is particularly serious for Maldives and Bangladesh.
  • Human health is also at risk from growing incidence of diseases linked to rising temperatures and rainfall variability. Effects may range from diarrheal diseases to increase malnutrition.

Clearly, climate change poses a serious risk to poverty reduction in South Asia and ought to be a central issue underlying country level poverty reduction strategies. Given the regional/global nature of the issue, actions at the country level alone will not do. Only sustained collective actions at the regional level coordinated with global efforts and combined with country specific interventions will help bring about the required changes. Climate change management will require actions on several fronts.

  • South Asia is still a small player in global carbon emission on aggregate and especially in per capita terms. As such it has a justifiable claim in its favor to a fair distribution of the cost of mitigation and adaptation to climate change. Yet, rapid economic growth in the region, especially India, and growing demand for energy is contributing to a rising incidence of carbon emission that needs to be managed.
  • In general, concerted efforts are needed to reduce the emission of carbon dioxide and other greenhouse gases through more sustainable use of energy, improved forestry management and better urbanization. Fortunately, South Asia’s largest carbon emitter India is taking steps to achieve a low carbon-growth trajectory. It could play a lead role in continuing to pursue this.
  • Using tax, pricing and regulatory policies to discourage use of technologies and activities that generate greenhouse gases.
  • A major factor contributing to India’s carbon emission is the rapid growth in energy use based on coal and oil as primary fuel. Other countries like Bangladesh, Bhutan and Nepal have very good gas-based or hydro-power supply potential. More energy trade at the regional level based on use of hydro-power and natural gas along with lower reliance on coal and oil will be a win-win for all.
  • Regional cooperation to improve water management and allocation aimed at reducing the incidence of floods while ensuring a more equitable distribution of water in each of the concerned countries for irrigation and other uses.
  • Regional cooperation for knowledge generation and sharing on climate change, water and energy resources to improve disaster management and promote private investments in sustainable energy and water resources.
  • Greater regional voice and activism in global fora to influence international action on climate change including equitable cost sharing arrangements, seek better international funding for climate change agenda in South Asia, and stronger participation in carbon trading and other related global facilities.

Managing the Politics of Cooperation in South Asia

 

The potential benefits of economic cooperation are obvious.   Global examples of successful cooperation agreements reinforce the point that possible gains for South Asia from effective cooperation and partnerships can be substantial. In particular, the experience of East Asia is illustrative of the potential gains from more and better cooperation. Cross-border physical connectivity has improved tremendously through land, sea and air-based transport network, private sector-led vertical integration of production networks has spurred industrial productivity and growth, and e-commerce is flourishing.

Yet, the actual experience with cooperation in South Asia so far has been rather dismal. What are the key constraining factors?

  • First and foremost is the prevalence of a number of regional disputes. These include the long-standing conflict between India and Pakistan over Kashmir, which has continued to strain relations between these two large neighbors. The Afghan-Pakistan relations are constrained by allegations of support for Talibans from sources in Pakistan. Similarly, securing the immigration and security issues in the India-Bangladesh border areas is a source of concern.
  • Second is the lack of good analysis and information in the public domain about the benefits of regional cooperation. On the contrary, there are unfounded populist negative perceptions in the smaller countries about how more cooperation will simply result in greater domination of India in political and economic matters of these countries.
  • A third factor has been internal political interests in countries that are divided along nationalistic, religious and ethnic lines which substantially complicate policy making that involve cross-border dialogue and cooperation.
  • Finally, and perhaps most importantly, the approach to international cooperation has been seriously flawed in that this has been largely seen as a bilateral politically-driven agenda rather than a cross-boundary commercial investment. The bilateral political approach has partly contributed to suspicions in smaller countries of India’s dominance.

International experience suggests that political constraints and historical conflicts need not be permanent barriers to development cooperation. Neither is the presence of a dominant member country a necessary threat to cooperation and shared gains. For example, the members of the European Union have fought numerous wars in the past, many of them far more intense, long drawn and expensive in terms of loss of human lives and material resources than South Asia. Similarly, member countries diverge considerably in economic strength. Yet they have found it mutually advantageous to come together and formulate a formidable economic union. In East Asia, the economic dominance of China has not prevented very effective regional cooperation with the much smaller East Asian countries.

Fortunately, the political environment for cooperation in South Asia is now changing. Historically, the regional cooperation efforts in South Asia culminated in the formation of the South Asian Regional Cooperation (SAARC) in 1985. Until very recently, SAARC has basically functioned as an annual event for meeting of heads of governments with declarations of cooperation intentions but with very limited implementation due to conflict and political difficulties. Armed with recent economic successes the political space for better regional cooperation is now growing in South Asia. The last two SAARC meetings have succeeded in bringing the countries much closer than ever before in recognizing the merits of regional cooperation and taking significant actions to realize these benefits.

A wide variety of small steps have been in taken in all aspects of cooperation under the SAARC ambit. Much of these steps involve establishment of committees and task forces and multiple meetings. These dialogues are important and should continue. However, to operationalize some of the most important resolutions and decisions, a somewhat different institutional architecture might be required. Here SAARC might want to carefully review the experiences of other more successful regional organizations like the European Union and the ASEAN. Even Africa has better cooperation experiences than South Asia and there may be important lessons that could be learnt and implemented.

Institutional change at the SAARC level however desirable will likely take a long time. In the meanwhile, from a pragmatic point of view, the next step is to identify concrete areas of cooperation where multi-country efforts would yield tangible benefits for citizens. The immediate priority areas are well known: promoting trade facilitation by removal of all trade barriers; improving regional transport by removing transit restrictions and opening up port facilities for international trade; promoting trade in energy in all possible ways including hydro-power, gas pipelines and regional grid facilities; and water cooperation to resolve flooding and irrigation problems. These need not involve all member countries in all projects. Specific projects will need to be realistically based on geography and location and will likely involve only the immediate neighbors and become sub-regional type initiatives.

Very importantly, cross-border transactions must be de-politicized and pursued on a commercial basis. Enabling national and international private investors to participate in these transactions hold the most promise of success than bilateral political deals. International financial institutions can also play a useful role. Where legal agreements are needed these can be best pursued multilaterally to avoid any perceptions of dominance.  

 

 

It is not realistic or necessary to expect that all political and social conflicts will have to be resolved first before meaningful cooperation can happen. Indeed, economic cooperation is also a powerful means for resolving political and social conflicts. Trust and goodwill at the citizens’ level can be a credible way for resolving conflicts. Economic cooperation by raising citizen’s welfare can be instrumental in building this trust. Political forces can provide impetus to this by reducing policy barriers to regional integration.


[1] Sadiq Ahmed is Vice Chairman of the Policy Research Institute of Bangladesh. This is an abridged version of a paper presented to the Sixth International Conference on South Asia organized by the Institute for South Asian Studies Singapore in November 2010.


Sadiq Ahmed is Vice Chairman of the Policy Research Institute of Bangladesh. He can be reached at 
e-mail: sahmed1952@live.com

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