Macroeconomic Reforms and Performance

Till the late 1960s, most of the developing economies, including those of East Asia, adopted closed macroeconomic policies with import substitution industrialization policies, under which self-reliance and indigenous efforts were encouraged. At the same time, a dominant role was assigned to the state in the development process. These import substitution strategies, coupled with the large public sectors, resulted in rent seeking activities ³ and uncompetitive production processes (Bhagawati and Srinivasan, 1975). Therefore, export-led industrialization and liberalization was advocated to make the production process efficient and competitive. Following the export-oriented growth argument (Bhagawati and Srinivasan, 1975 and Kruger, 1975), and the success of East Asian countries with higher exports and economic growth⁴ during the period from the early seventies to mid nineties, most of the South Asian countries started opening up their economies from the early eighties. The South Asian economies are currently enjoying the benefits of economic reforms, particularly reforms related to trade and investment. These countries undertook reform processes and opened up their economies after having experienced sluggish growth rates throughout the seventies and eighties. The following section briefly explains the economic reforms and macroeconomic performance in South Asian countries during last two decades.

Economic Reforms in South Asia

India: Economic reforms started in the early eighties, but a comprehensive liberalisation and privatization process started in July 1991 in the backdrop of the balance of payment crisis and foreign exchange liquidity crisis faced by the economy. Since then, there have been attempts to integrate the Indian economy with the rest of the world in a variety of ways, i.e., the removal of quantitative restrictions, ⁵ reducing tariffs ⁶ and exchange rate flexibility. ⁷ India launched its second-generation reforms in 2002, with a focus on reducing the fiscal deficit, improving infrastructure, reforming labor laws ⁸ and energizing the states to participate actively in stepping up the pace of reforms. India raised its FDI limits in many important sectors including telecommunication, banking and insurance and civil aviation.

Bangladesh: Major reforms were implemented as a part of structural adjustment policies under the auspices of the World Bank and the IMF in the 1980s and early 1990s. The efforts started with World Bank structural and sectoral adjustment loans (SALs and SECLs) in 1980. IMF introduced a three-year structural adjustment facility (SAF) in 1986 under which major reform initiatives were undertaken in areas such as agricultural policy, trade and industrial policy, along with privatization and public enterprise reforms, fiscal policy reform and financial sector reform. Moreover, the implementation of these reforms gained momentum during the 1990s.

Pakistan: Though several reform measures were carried out prior to 2001, formally the economic reforms programme had its genesis in the year 2001 when Pakistan signed a threeyear arrangement with IMF under the Poverty Reduction and Growth Facility (PRGF) programme. Since its approval, seven program reviews have been completed successfully and discussions for the eighth review have been scheduled for April 2006. The key to restoring growth has been the authorities' determined implementation of sound financial policies and structural reforms including tax reform, financial sector reform, investment policies including FDI policy, and enterprise reform. These policies have reduced distortions and increased efficiency, and also lifted uncertainty about the future course of economic policies.

Sri Lanka: In 1977, Sri Lanka became the first among all the South Asian economies to open up its economy to the outside world, and even to this day it remains one of the most outward oriented economies in the region. ⁹ The economic reforms, from their inception, marked a sharp shift from a relatively closed economy prioritizing import substitution policies to a liberalized market and an export-oriented economy. ¹⁰ Some of the major reforms were carried out in the areas of: (i) liberalization of trade policy and exchange rate system; (ii) export promotion and incentives to investment, and (iii) the rationalisation of public expenditure.

Nepal: In line with changes in the development aid strategy of donors, Nepal embarked upon a new economic policy regime in the mid 1980s. It has carried out various components of economic reform policies including fiscal, trade and FDI policies during the last decade. Quantitative restrictions on imports have been fully removed. Customs duties have been rationalized and substantially reduced. Reforms have also been executed on the foreign exchange front. However, political instability has stopped the reform process and the ambitions of the business community.

Macro Economic Performance of South Asia Countries

It is evident that all the five south Asian countries, i.e., India, Pakistan, Bangladesh, Sri Lanka and Nepal, have been consistently following economic reform policies emphasizing the market economy and integrating their economies with the rest of the world. Consequently, all the countries in the region except Pakistan have also experienced higher economic growth during the nineties, with more open macroeconomic policies with a focus on export promotion.

The average growth rate ¹¹ of India increased to 5.92 percent during 1991-2002 from 5.6 percent during 1980-90 (see Table-1 in Appendix-B [ PDF 133.8KB | 23 pages ] ¹²). Bangladesh, Sri Lanka and Nepal also had higher GDP growth rates in the nineties than the eighties. While the higher growth in India during 1991-2002 was accompanied by substantial growth in the service sector and a marginal improvement of the agricultural sector, the growth in Bangladesh, Sri Lanka and Nepal was supported by both higher industrial and service sector growth. But, GDP growth rate in Pakistan slowed down substantially during the nineties compared to the eighties due to internal conflict, political instability, social insecurity, and the interrupted business climate. Per capita income growth also slowed down in Pakistan during the nineties, whereas it improved in India, Bangladesh, Sri Lanka and Nepal. Other important macro indicators like gross domestic savings and gross domestic capital formation improved in all these countries except Pakistan.

Following economic reforms, particularly trade reforms in these countries during the nineties, export and import growth has substantially improved. Further, India, Bangladesh, Sri Lanka and Nepal have improved considerably on the external sector front such as the current account balance, capital account, foreign exchange reserves and overall improvement in balance of payments during the post-reform period.

There has also been an improvement in most of the macro indicators except the fiscal deficit, both on the domestic and external sector front. Indeed, the South Asian region has been one of the fastest growing regions in the world in recent years. The above analysis suggests that with the exception of Pakistan, the South Asian countries have registered higher export growth during the nineties than the eighties. Though Pakistan failed to accelerate its exports growth in the 1990s, it has managed to maintain a constant rise of exports in absolute value. All the countries except Pakistan have also experienced higher economic growth during the nineties, with more open macroeconomic policies emphasizing export promotion.

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