Economic Growth and Infrastructure

The experience of nations everywhere since the end of World War II—openness to external trade and foreign investment—permits more rapid economic growth than protectionist regimes achieve. Countries which have chosen to integrate with the global economy have done better in reducing poverty in the long run.

Rising income is increasingly relevant for the participation of developing countries and least developed countries (LDCs) in the globalized economy. In South Asia during the 1990s, as India and Bangladesh followed Sri Lanka into the ranks of countries known as rapid globalizers, strong growth tallied with sharp drops in poverty incidence—from 51% in 1977– 1978 to 27% in 1999–2000 in India, and from 45% in 1991 to 34% in 2000 in Bangladesh (World Bank, 2004). Bangladesh did well in the 1990s in raising its per capita income, compared to its performance in the previous three decades. In fact, in the 1990s, the country’s per capita income growth crossed not only that of Pakistan but also South Asia’s average, and the momentum continued for the next four years (see Table 1 [ PDF 10.3KB | 1 page ]). Bangladesh has also made considerable gains in poverty reduction and primary education. With respect to universal primary education, girls and boys in the primary and secondary schools are equal in number. Bangladesh’s infant mortality rate is lower than that of India, and it could achieve the Millennium Development Goal of reducing its infant mortality rate by two thirds by 2015 (World Bank, 2004). However, over 63 million people still live in poverty, making Bangladesh one of the poorest countries in the world. Despite improvements, access to education, health care, and jobs are still unequal in the country. In general, 1980–2004 saw a significantly high per capita income growth in South Asia, although Pakistan and Sri Lanka—because of political reasons and ethnic conflict, respectively—suffered setbacks. Therefore, the effect on poverty reduction in India and Bangladesh, where growth was the principal driver of poverty reduction, was dramatic.

The South Asian economies are well endowed with labor. Trade openness is therefore expected to stimulate production and expansion of labor-intensive exports, thus generating employment, raising wages, and thereby reducing poverty. The link between greater trade openness and poverty reduction need not be direct; it could be through the positive impact of trade expansion on growth performance, a correlation that has been established in extensive empirical research. Cross-country studies on the relationship between growth performance and poverty reduction lead to the conclusion that a close correspondence exists between growth of per capita income and growth of per capita infrastructure stocks, though not all growth is necessarily pro-poor.

More importantly, trade openness is a necessary but not a sufficient condition for rapid growth. The growth impact of trade may be an important factor underlying the observed changes in poverty and inequality. Trade policy reforms generally have to be accompanied by complementary measures for ensuring macroeconomic stability and efficient financial intermediation, improving infrastructure services, improving the investment climate for private enterprises, and removing barriers to trade.

According to trade theory, the benefits of globalization in terms of trade liberalization are expected to flow to abundant factors, and to unskilled labor in developing countries such as India and Bangladesh. Trade creates both winners and losers in the short term, and sometimes that may be unfavorable for the lower income groups. In the short term, trade liberalization acts more like an (indirect) income distribution policy than a poverty alleviating policy. Rather, the long-term or growth impact of trade liberalization is more important as well as sustaining for poverty alleviation (Acharyya, 2006). A recent study (Banerjee and Newman, 2004) suggests that removing trade barriers may adversely affect the wages of unskilled labor in labor-abundant developing countries. In the long run, economic integration could foster rapid economic growth and a significant rise in the standard of living, hence reducing poverty. But during the transition, the burden of adjustment might fall disproportionably on poor people. Another study (Topalova, 2005) on the impact of trade liberalization on poverty reduction in Indian districts concludes that the effects of trade liberalization were not uniform over districts. Liberalization had insignificant benefits (or a disproportionate share of burden) with respect to poverty reduction for those districts that are more exposed to potential foreign competition. Therefore, appropriate policies may be required to address the social cost of inequality by redistributing the gains of trade liberalization. Strengthening labor mobility in the short to medium term is thus crucial to reduce the adjustment burden of liberalization.

In spite of strong per capita GDP growth in the 1990s, the progress in the infrastructure sector in India and Bangladesh has failed to keep pace with its growth in trade (Ghosh and De, 2000; De and Ghosh, 2003; De, 2005). There is now broad consensus that openness to trade, coupled with improved infrastructure, must be a key component of policies to accelerate economic growth in South Asia (ADB, 2006b). Therefore, faster progress in infrastructure development will be crucial to sustaining South Asia’s competitive advantages.

Low quality of infrastructure, coupled with high logistics costs for India and Bangladesh, is derived from poor transport infrastructure, underdeveloped transport and logistics services, and slow and costly bureaucratic procedures dealing with bilateral trade (De, 2005). The opportunities for improving infrastructure facilities are immense given that India and Bangladesh offer the similar characteristics of high population growth and high incidence of poverty. India and Bangladesh can mutually reinforce one another’s economic strengths by synergizing their complementarities in the areas of industry, services, trade, and technology provided these economies put in place adequate infrastructure facilities. Interestingly, setting in place adequate infrastructure is getting momentum because of the rising stock of intraregional capital, represented by foreign exchange reserves ($143.76 billion in 2004), and growing fixed capital formation (21.96% of GDP in 2004). Bangladesh and India have realized that without having proper infrastructure in place, foreign direct investments (only $1.69 billion for Bangladesh and $39.66 billion for India for 1990–2004) may not flow in large amounts despite the region’s labor cost advantage (Sahoo, 2006). Table 2 [ PDF 10.3KB | 1 page ] briefly captures these findings.

The relative paucity of integrated and improved infrastructure networks in South Asia is not difficult to remove, given the region’s outward-looking policies and increasing openness. Liberalization in India has made the region’s economies more dynamic in several ways. South Asia is becoming more open, outward-oriented, and more receptive to foreign investment and trade. At this juncture, working together to improve infrastructure facilities, an essential element in enhancing intra-regional trade, will pave the way for the region’s international market access and, through this, to higher income.

The key objective of the cooperation in trade and investment is to achieve more rapid growth in exports through improvements in product design, marketing, financing, and logistics. Appropriate industries with potential comparative advantage need to be identified. Associated soft infrastructure to support trade and investment should be in place. These include: (i) approval and implementation of required legal and policy reforms; (ii) implementation of effective border crossing and transport services; (iii) effective agreement on trade and transit treaties between participating countries in the context of the SAARC, SASEC, BIMSTEC; (iv) establishment of a facility to encourage investments in small and medium enterprise exporters and to improve their market access; and (vi) promotion of human resource development, better education, and appropriate technology transfer.

The aim of cooperation among South Asian countries in general and between India and Bangladesh in particular should be to use the available resources optimally to provide maximum welfare in the whole region. Naturally, the rationale for this type of cooperation lies in removing visible and invisible trade barriers, and exploiting the complementarities for the mutual benefit of all.

The literature offers substantial evidence linking improvements in infrastructure directly to improvements in export performance of a country or a region. The effects are especially strong when importers have access to multiple suppliers of highly substitutable commodities.⁴ Several studies show that the quality of transport infrastructure improves international market access of a region and leads directly to increased trade and, through this, to higher incomes. The question is whether policy-induced improvement of such critical infrastructure matters. The answer is: it does. Figure 1 [ PDF 14.6KB | 1 page ] provides a better understanding of the proposition in the context of South Asia. Those countries lying above the fitted line score high on measures of openness, and are accessible to world markets in the sense of having superior infrastructure facilities. In the recent period, these countries are Sri Lanka, Bangladesh, and Nepal. India and Pakistan lie below the fitted curve. Economies with higher openness and with fewer political barriers to trade enjoy greater returns to infrastructure investments than those whose political system and poor infrastructure facilities prevent trade growth. If Sri Lanka is an example of the former, India and Pakistan are the cases of the latter. Benefits from free trade would thus be limited if infrastructure services, particularly transport infrastructure, are too weak to support the trade growth.

Figure 1 thus suggests the importance of two features in the context of South Asian economies: openness, and infrastructure stock and economic growth. The economies that are successful in placing themselves at a higher plateau for a longer time and moving toward the upper right corner of the diagram (here only Sri Lanka) enjoy a higher income than those below the fitted curve. Causality probably runs both ways. Economies like those of Singapore and Hong Kong, China have grown rich in part because their past investments in superior logistics including ports have facilitated trade. Meanwhile, India and Bangladesh still suffer from poor port facilities. Countries that are outward-oriented with modern port facilities (Sri Lanka) are better equipped to enjoy the benefits of borderless global trade than countries that are open but equipped with relatively poor facilities (Bangladesh).⁵ Regional cooperation in the region is needed to bring up to speed those countries that lag behind. Establishing well-functioning, efficient, and integrated transport infrastructure facilities is essential for the economic development and trade growth of both individual countries and the region as a whole.

Download this Discussion Paper [ PDF 223.8KB| 44 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.