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Global Economy

Boosting South Asian Trade – Carpe Diem!

Sanjay Kathuria's picture
sar-trade-manufacturing
Ismail Ferdous/World Bank

South Asia’s Commerce Ministers meet in Thimphu on July 24. Getting there would not have been easy for many of them, with no direct flights between Thimphu and four of the seven capitals. In June, when some of us convened for a regional meeting in Kathmandu, our Pakistani colleagues had to take a 20 hour flight from Karachi to Dubai in order to get to Kathmandu! This is symptomatic of the overall state of economic engagement within South Asia—in trade in goods and services, foreign direct investment and tourism.

South Asian countries’ trade policies remain inward-looking compared to other regions, and there are even bigger barriers to trade within the region. Today, South Asia today is less economically integrated than it was 50 years ago. Figure 1 below shows that intra-regional trade in South Asia accounts for less than 5 percent of total trade, lower than any other region. 

July 18, 2014: This Week in #SouthAsiaDev

Mary Ongwen's picture
We've rounded up 22 tweets, posts, links, and +1's on South Asia-related development news, innovation and social good that caught our eye this week. Countries included: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal

The Downside of Proximity

Sanjay Kathuria's picture

 

Buy a leather case for your wife’s smartphone on Amazon, select shipping from China with an estimated delivery time of 4-6 weeks, and then be pleasantly surprised when it turns up on your Virginia doorstep in 11 days.  The marvels of the modern age – of technology, globalization, and shrinking distances.

Where does South Asia stand on export delivery? Figure 1 illustrates that compared to other economic units around the globe, it is a lot more difficult to trade with(in) SAFTA (South Asia Free Trade Agreement). It also shows that bureaucratic hurdles and the time it takes to trade go hand-in-hand. While the region does relatively well on trade with Europe or East Asia, intra-South Asian trade has remained low and costly.  It costs South Asian countries more to trade with their immediate neighbors, compared to their costs to trade with distant Brazil (see below)!  In fact, it is cheaper for South Asian countries to export to anywhere else in the world than to export to each other (Figure 3).  In other words, South Asia has converted its proximity into a handicap.   

Can political stability hurt economic growth?

Zahid Hussain's picture

Mumbai traffic, India. Simone D. McCourtie / World Bank
The standard definition of political instability is the propensity of a government collapse either because of conflicts or rampant competition between various political parties. Also, the occurrence of a government change increases the likelihood of subsequent changes. Political instability tends to be persistent.
 
Economic growth and political stability are deeply interconnected. On the one hand, the uncertainty associated with an unstable political environment may reduce investment and the pace of economic development. On the other hand, poor economic performance may lead to government collapse and political unrest. However, political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. In these cases, political stability is a double edged sword. While the peaceful environment that political stability may offer is a desideratum, it could easily become a breeding ground for cronyism with impunity. Such is the dilemma that many countries with a fragile political order have to face.  
 
Political stability is by no means the norm in human history. Democratic regimes, like all political regimes, are fragile. Irrespective of political regimes, if a country does not need to worry about conflicts and radical changes of regimes, the people can concentrate on working, saving, and investing. The recent empirical literature on corruption has identified a long list of variables that correlate significantly with corruption. Among the factors found to reduce corruption are decades-long tradition of democracy and political stability. In today’s world, however, there are many countries that combine one of these two robust determinants of corruption with the opposite of the other: politically stable autocracies or newly formed and unstable democracies.

Some see political stability as a condition that not only precludes any form of change, but also demoralizes the public.  Innovation and ingenuity take a backseat. Many seek change in all sectors of life--politics, business, culture--in order to have a brighter future through better opportunities. Of course change is always risky. Yet it is necessary. Political stability can take the form of complacency and stagnation that does not allow competition.  The principles of competition do not only apply to business. Competition can be applied in everything – political systems, education, business, innovation, even arts. Political stability in this case refers to the lack of real competition for the governing elite. The ‘politically stable’ system enforces stringent barriers to personal freedoms. Similarly, other freedoms such as freedom of press, freedom of religion, access to the internet, and political dissent are also truncated. This breeds abuse of power and corruption.

Vietnam, for example, is controlled entirely by the ruling party. The economy is one of the most volatile in Asia.  What once was thought of being a promising economy has recently been in distress. Vietnam’s macro economy was relatively stable in the 1997-2006 period, with low inflation, a 7 to 9 percent total output expansion annually and a moderate level of trade deficit. But Vietnam could not weather the adverse impact from the 1997-98 Asian financial turmoil, which partly curbed the FDI flow into its economy. Starting in late 2006, both public and private sector firms began to experience structural problems, rising inefficiency, and waste of resources. The daunting problem of inflation recurred, peaking at an annualized 23 percent level for that year.

Maafushi Island Shows the Way for Inclusive Wealth Creation through Tourism

Sandya Salgado's picture



The success story of Maafushi, an island in the Kaafu Atoll in the Maldives, dates back to 2009 when the government liberalized its policy on local tourism. A visionary entrepreneur, Ahmed Naseer, lost no time in starting a four roomed guest house in 2010, to kick start the concept of local tourism in his home island Maafushi. And the rest is history!

Maafushi’s expansion from one guest house in 2010 to thirty guest houses to date is a remarkable success story which I was privileged to witness firsthand last week. 

An island with 2000 locals had welcomed 600 tourists last year. They were coming in search of an affordable, simple holiday, just for the sun and sea experience, living amongst the islanders while experiencing theiruniqueculture and lifestyle. Maafushi’s model of attracting local tourists has provided an alternative to the high end tourism that Maldives is known world over for. 

May 30, 2014: This Week in #SouthAsiaDev

Mary Ongwen's picture
We've rounded up 20 tweets, posts, links, and +1's on South Asia-related development news, innovation and social good that caught our eye this week. Countries included: Afghanistan, Bangladesh, India, Maldives.

May 16, 2014: This Week in #SouthAsiaDev

Mary Ongwen's picture
We've rounded up 18 tweets, posts, links, and +1's on South Asia-related development news, innovation and social good that caught our eye this week. Countries included: Afghanistan, Bangladesh, India, Nepal, Pakistan, and Sri Lanka.

The perils of competition

Zahid Hussain's picture


Promoting competition is considered the best available option for increasing economic well-being. The recent global financial crisis prompted policymakers to reconsider basic assumptions, but the virtues of competition were not among them. However, gone are the days when practitioners slept sound thinking the economy, if left alone, is self-correcting.

The limitations of competition as a force for universal good are well-known. Consumers can be inadequately informed, making it possible for firms to take advantage of them. The intrinsic difficulty of matching skills to positions and the costs associated with moving jobs may make workers stay with abusive employers. More basically, in a world where people have imperfect information and workers can’t always leave their employer, firms may be able to respond by cutting corners and abusing consumers and workers.

Is the problem with competition itself or the legal and informal institutions that yield this type of competition? The answer depends in part on one’s ideological lens—namely the belief of competition existing outside a regulatory framework, necessitating governmental intervention in the marketplace versus the belief that regulatory forces help create, define, and nurture competition in the market, necessitating improvements to the legal framework if competition is failing.

Some policies that supposedly restrict competition are justified for promoting competition. Intellectual property rights, for example, can restrict competition along lets say the use of a trade name. But the argument is that intellectual property and antitrust policies complement, rather than conflict, one another in promoting innovation and competition.

Life will surely be more stressful if we needed to compete for everything. Cooperation is often more relaxing. Society and competitors at times benefit when rivals cooperate in joint ventures to address collective needs. Competition can make people less cooperative, promote free-riding, and reduce contributions to public goods, thus leaving society worse off.

The point is not all forms of competition are beneficial. Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. Bangladesh’s garment industry is a contemporary case in point.  The collapse of Rana Plaza in Bangladesh brought to the fore the pathetic state of working conditions in many factories serving the global supply chains. The structure of the supply chain itself—the relationship among regulators, buyers, suppliers, and workers—is fundamentally related to these problems. 
The practice of subcontracting is routine in Bangladesh’s garment industry. The prevalence of competitive indirect sourcing strategies has resulted in a supply chain driven by the pursuit of nominal cost minimization. It has increased risks for business and workers by undermining prices, wages, working conditions, and investment in productivity and quality. The apparel units engaged in sub-contracting are mostly non-compliant particularly in paying wages and maintaining safety standards.

Question is why do compliant factory owners take recourse to such sub-contractors? Major global buyers see Bangladesh as a market where they can obtain the most competitive prices for a high volume of lower end products. Consequently, they set low price targets. The manufacturers compete for large orders by undercutting each other, further driving down the prices. They make delivery commitments far in excess of their capacity to produce without breaching compliance. When prices are dramatically driven down, the natural tendency of a garment manufacturer is to manage their unit at a least cost with regard to overheads and wages. The pressure to drive these down arise inevitably.

Kafala neither guarantees nor cares: guest workers in the Gulf

Zahid Hussain's picture

Thomas Sennett / World Bank
Guest workers have played an integral role in the Gulf since the 1970s where the demographic changes accompanying these labor flows occurred at an extraordinarily rapid pace. The region’s aggregate population has increased more than tenfold in a little over half a century, but in no other region of the world do citizens comprise such a small proportion of the population. While this ‘demographic imbalance’ makes the Gulf unique, what differentiates it is not its economic and demographic expansion through migration but the degree to which the region’s governments have excluded foreign workers from being integrated into the national polity. This exclusion of foreign workers is a result of a conscious policy.
 
Labor migration to Gulf Cooperation Council (GCC) countries are mostly governed under a sponsorship system known as Kafala.  Migrant workers require a national sponsor (called Kafeel) and are only allowed to work for the visa sponsoring firm. The workers must obtain a no-objection certificate from the sponsor to resign and have to leave the country upon termination of the usual 2 to 3 years’ contract before being allowed to commence a new contract under a new sponsor. Tied to the sponsor, the migrants become immobile within the internal labor market for the duration of the contract. Consequently the sponsors benefit from non-competitive environments where they extract substantial economic rents from migrant workers at the expense of inducing significant inefficiencies in production.
 
The Kafeels pay workers an income above the wage in their country of origin and obtain economic rents equal to the difference between such earnings and the net marginal return from employing the migrant worker. Migrant workers are paid the initial nominal wage throughout the entire contractual period. They are even made to accept lower wages than contracted initially. Immobilized by labor restrictions, workers cannot command a higher wage even when there is demand for their services by rival firms willing to hire them in order to avoid the cost of hiring from abroad.  Kafeels have also found other ways of extracting rents in recent decades by indulging in visa trading.  They allow their names to be used to sponsor foreign workers in exchange for monetary gains.
 
Arguably, rents per-se should not directly create adverse effects because they are essentially redistributive transfers. Earnings paid to migrants are sufficient to motivate them to migrate. The migrants do not leave. But this view is over-simplistic. The combination of short contracts, flat wages, and lack of internal mobility kills the incentives for migrant workers to exercise higher effort levels in production and engage in activities that enhance their human capital.  Any productivity gain would go to the sponsor in the form of rents. The system provides incentives to entrepreneurs to concentrate on low-skills, labor-intensive activities where the extraction of economic rents is easier. Such sponsor-worker behavior explains for instance why despite the massive investments in Dubai, the economy-wide efficiency levels (average labor productivity) have not improved in the last two decades while in Hong Kong, they doubled and in Singapore quadrupled.

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