Engine for Dynamism and Stability
Edited by Masahiro Kawai, Jong-Wha Lee, Peter A. Petri and Giovanni Capanelli
Chapter 12: South Asian Integration: Prospects and Lessons from East Asia
Ramesh Chandra and Rajiv Kumar INTRODUCTION 12.1 The South Asian region consists of one large country, India, surrounded by a number of medium-sized and small countries – Afghanistan, Bangladesh, Bhutan, the Maldives, Nepal, Pakistan and Sri Lanka. India accounts for about 78 percent of the region’s GDP, Pakistan 11.2 percent, Bangladesh 7.3 percent, and Sri Lanka 2.4 percent. The region is generally poor and backward even by Asian standards, but has recently shown good economic performance as a result of the liberalization policies of the past two decades. Traditionally, in line with prevailing mainstream development thinking, South Asia as a region followed an inward-looking import substitution development strategy that favored domestic production and discriminated against exports. This strategy involved not only industrialization behind high tariff walls, but also direct controls in the form of import and industrial licensing. Exchange rates were generally overvalued and interest rates suffered from financial repression. There was undue governmental intervention in the working of the market. The net outcome of these policies was to distort incentives and misallocate resources. Thus, the results obtained were suboptimal in terms of GDP growth, per capita income growth, export growth and poverty reduction. While many developing countries of East Asia – after completing the first stage of import substitution – switched over to export expansion, countries of South Asia continued into deeper and deeper import substitution. It took a long time for South Asian countries to realize the futility of such policies. It was only in the 1980s and 1990s that South...
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