The Subcontinental Bazaar

LAHORE. South Asia seems to have remained immune to the recent phenomenon ofthe "borderless world." All movements (goods, people, capital,information), especially between the Pakistani-Indian border, remain restricted– though signs of change are appearing.

The notion of improved Indo-Pakistan relations has been proven wrong so oftenthat the premium has been on cynicism and pessimism. But the recently held"Punjab Games," involving some 750 Indian and Pakistani sportsmen fromboth sides of the divided state of Punjab, cannot but be a heart-warmingdevelopment. This followed the March 2004 cricket test match between the twonations, who had previously been on the brink of nuclear war. The renewed sportsdiplomacy reflects a thaw in the bellicose relations between the two countries.And as formal diplomatic relations also look to be warming, this portendsauspicious developments for the entire Indian subcontinent and an enormous boonto the whole central and south Asian region.

As Asia rises in the global firmament and appears poised to play a dominantrole in the 21st century, the conventional wisdom is that China will take thelead. From a long view, however, the Indian subcontinent may yet astonish theplanet.

A brief look at history reveals its enormous legacy to the world. Thebirthplace of major civilizations and religions, notably Hinduism and Buddhism,the subcontinent is home to one-third (380 million) of the world's Muslims. Thiscrossroads of civilisations produced outstanding art, architecture, astronomy,literature, painting, industry, sculpture, music, and philosophy. Sinceindependence and partition in 1947, cultural output has remained very strong;the subcontinent's entrepreneurs are important actors and wealth creators inplaces ranging from Kenya to California, while its academics, writers, jurists,and scientists are prominent in centers of excellence across the West.

On the economic front, however, until recently, the record has reverberatedbetween disappointing and disastrous. It is ironic that the subcontinent'sdiaspora should in so many ways be so successful in contrast with the hithertodismal conditions of their home countries.

Whereas East Asia exported manufactured goods, the Indian subcontinentexported people, often including its best and brightest. This is due in part toits upside-down educational pyramid. While tertiary education, especially intechnology and management, is strong, primary and secondary education is weak.The 2004 United Nations Human Development Report education index measured adultliteracy, the combined enrolment ratio for primary, secondary, and tertiaryeducation, and the share of education expenditure to GDP. The lamentable scoresof India, Bangladesh, and Pakistan paled in comparison to figures for the EastAsian countries. There are more illiterates in India than in the rest of theworld combined, and illiteracy among women in the Indian subcontinent surpasses50 percent.

Thus, while there is ample brain, it outweighs the rest of the body – thebrawn is weak. The brain drain has been acute: At one point, over 80 percent ofIndia's software engineers went to work abroad. The failures in basic educationare compounded by widespread poverty; a highly over-regulated, closed, and hencecorrupt environment for business; appalling infrastructure; and in Pakistan andBangladesh (less so in India), the absence of a solid middle-class.

Furthermore, unlike East Asia, which succeeded in transforming itself fromone of the world's bloodiest battlefields into one of its most thrivingmarketplaces, the Indian subcontinent remains divided in many ways. Whereasintra-regional trade in East Asia corresponds to over 50 percent of its totaltrade, the figure in South Asia is a paltry 2 percent; even considering illegalcross-border smuggling and indirect trade through Dubai, the figure stilllanguishes behind that of the more dynamic part of the Asian continent.

However, the winds of change have been blowing. Beginning in theearly/mid-1990s, quite significant reforms have been implemented, several ofwhich have led to Bangladesh, India, and Pakistan becoming more outward-looking.This has resulted in much higher economic growth rates and in a reverse braindrain as many scientists, engineers, and entrepreneurs have returned to takeadvantage of the more dynamic climate. Tariffs have been greatly reduced,exports have risen, and foreign direct investment has been welcomed. With acurrent combined population of 1.4 billion – expected to reach 1.73 billion in2020 – the Indian subcontinent's economies must grow.

Though recent trends are encouraging, in order to realize the subcontinent'sfull potential, three main obstacles must be removed, or at the very least,diminished.

First, at the global level, the Indian subcontinent's export prowess isblunted in industrialized countries' markets by various tariff and non-tariffmeasures. To cite one example out of many: In the first three months of 2003,according to the US Progressive Policy Institute (PPI), goods imported into theUnited States from France totalled US$6.846 billion for which tariff revenue ofUS$80 million was collected, while total imports from Bangladesh were US$557million, for which US$85 million in tariffs were paid. Indeed, for all of 2003,duties paid to US customs on imports of apparels from Bangladesh came to US$306million, while in the same year Bangladesh's gross receipt of bilateral US aidwas less than US$35 million. Ample discrimination against exports from theIndian subcontinent can be cited in many areas, including the movement of labor;the strident Western outcry over outsourcing is a recent variation on awell-known theme.

Second, the bad news on the global front is, unfortunately, more thanreplicated on the regional front. As noted above, only 2 percent of the region'strade is intra-regional. In 2002, whereas Bangladesh exported US$1.90 billionworth of goods to the American market, exports to the Indian market accountedfor a miserable $60 million. India also practices the same double standards.Thus, according to the PPI, since "India's tariff on cotton skirts is 30percent or 110 rupees, whichever is higher, a US$200 cotton skirt from Milan hasa 30 percent tariff; but a US$2 skirt from Bangladesh has a fee equivalent to a250 percent tariff." This regional protectionism seriously undermines theregion's competitiveness, including in its attractiveness to foreign investors.

Third, on the domestic front, while the reforms have helped, a great deal ofwork remains. There is a big difference between formulating reforms andimplementing them! There is still far too much red tape, far too muchcorruption, far too much disregard of the rule of law, far too many spokes putin the wheels of entrepreneurs, and still insufficient investment in people.

Fundamentally, however, one can be confident that the current direction willbe maintained and that the pace will be accelerated. Indian, Pakistani, andBangladeshi entrepreneurs are increasingly developing regional strategies. TataSteel and Bajaj Motors, two key Indian corporate players, are envisaging plantsin Pakistan. Pakistanis are investing in India, including in software. Businessleaders are conscious that only by creating an integrated sub-continental marketwill they really be able to compete with China, including in attracting foreigninvestments. In the meantime, the international community must do everything inits power to facilitate and encourage – not impede and discourage – thisdevelopment. A prosperous Indian sub-continent will be a great contribution tothe 21st century.

Huma Fakhar is a partner of Fakhar Law International, based in Lahore;Jean-Pierre Lehmann is Professor of International Political Economy at IMD,Lausanne, and Founding Director of The Evian Group. This article appeared in YaleGlobalOnline, a publication of the Yale Center for the Study of Globalization, and is reprinted bypermission. Copyright © 2004 Yale Center for the Study of Globalization