Last week, I discussed the two very different South Asias and the need for regional cooperation to bring the lagging regions up to the standards of thriving regions. However, increased market integration by itself will not be sufficient to accelerate growth and benefit the lagging regions. South Asia suffers from a massive infrastructure deficit. Infrastructure is like second-nature geography, which can reduce the time and monetary costs to reach markets and thus overcome the limitations of physical geography.
Improved infrastructure that enhances 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.
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, 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 exploitation of Nepal’s hydropower potential because of inadequate cooperation with India.
Infrastructure is one sector where the problems of policy deficit and service deficit can not be resolved without addressing the greater problem of cooperation deficit. The benefits of regional cooperation can be huge because it increases the size of the market, unleashes the benefits of agglomeration and economies of scale, ensures equitable sharing of benefits, and integrates landlocked and lagging regions with leading regions.
An example of a regional cooperation success story can be found in the Indus Water Treaty between India and Pakistan. This helped unleash the Green Revolution in the two Punjabs. There are many other potential regional cooperation success stories in IT and IT-enabled services (education and health), energy, road, water management, and climate change; I will discuss these areas in more detail in the following weeks.
Which is your favorite area for regional cooperation? What is holding it back?