Trade policies in South Asia

However, the importance of the seminar to me was immense given the fact that attempts at opening up economies began over two decades back and there was hardly any realistic assessments of policies so far. Admittedly, in most of the presentations that I had the privilege to participate before, emotions outplayed economics in some cases and economics outplayed environment and ethics, in others. The seminar papers that I am referring to in this column could thus claim a departure from traditional tone of discourse as more empirical evidences were substituted for hard-boiled theoretical and emotional juxtaposition. Allow me to submit few of the observations given the space constraint.

The overview starts with a premise and a prescription pertaining to trade, growth and poverty. "In South Asia, during the 1990s, as India and Bangladesh followed Sri Lanka into the ranks of countries known as rapid globalisers, strong growth tallied with sharp drops in poverty incidence -- from 51 per cent in 1977-78 to 27 per cent in 1999-2000 in India and from 45 per cent in 1991 to 34 per cent in 2000 in Bangladesh". Supported by both general and regional evidence, "the premise of the study is that the poor of South Asia would be among the significant beneficiaries of wider, faster, more determined trade liberalisation than policy makers so far pursued." To drive home their point, the authors also drew upon the seminal submission by Art Kraay and David Dollar. It has been observed that a third of the developing countries termed as "rapid globalisers" did extremely well in terms of income growth and poverty reduction over the past two decades. "These countries, which include Bangladesh, India and Sri Lanka in South Asia, have also experienced large increase in trade and significant reductions in tariff and non-tariff barriers."

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For the South Asia region as a whole, the period 1985-2000 witnessed a significant win over a situation of 'low level equilibrium tarp'. For Bangladesh, the growth rates of late 1990s seem to have shown that openness did not hurt growth rates. However, one needs to note that openness is a necessary, not a sufficient condition for rapid growth. The complimentary policies -- well known to policy makers and politicians -- failed to live up to expectations and hence bedevilled the breakthroughs that one would have expected from openness of the economy. There is another problem with policy makers that I noticed. Those who went for liberalisation of the economy while in power, turned out to be staunch critics while in opposition and vice versa. Thus on many occasions reforms remained mere rhetoric without ownership worth the salt.

One important lesson that the overview paper seems to suggest is exchange rate liberalisation. Relatively flexible exchange rate policies followed by India, Pakistan and Bangladesh should continue. The other important observation is that Customs Duty (CD) rates alone give a misleading impression of actual protection rates for domestic industries. This is particularly pertinent for Bangladesh where a faster reduction in CD rates has been correlated with a faster liberalisation. India, Bangladesh, Sri Lanka and Nepal apply other protective taxes on top of CD. India in particular and others also tend to use specific tariffs which can correspond to a very high ad valorem equivalent rates and Bangladesh employs two additional protective taxes for selected products. " After allowing for these, it is evident that tariffs are still very high in India and Bangladesh: in fact, compared with average tariffs in 105 developing countries on all products, agricultural products and manufactured products, India currently ranks second, third and second and Bangladesh ranks seventh, eighth and eighth. Pakistan and Sri Lanka (excepting agriculture) continue to remain as low tariff country."

As tariffs came down in South Asia, the contribution of protective duties also went down. By 2001, all governments were much less dependent on tariffs than they had been 10 years back. Mentionably, introduction of trade neutral taxes and their extension, and improvements in collection efficiency helped. China is cited as a unique example where import duties are currently less than 3 per cent of total imports and only 3-4 per cent of government revenue. This compares with about 18 per cent of total imports and about 10 per cent of total central and state taxes in India in 2000/2001. In Bangladesh, protective import taxes constitute about 28 per cent of total tax revenue.

Antidumping Duties (AD) emerged as an important issue in the seminar. Quite obviously and in the face of growing antidumping duties imposed by India, the deliberation on dumping drew much of the attention. Antidumping duties are not used in Bangladesh, Sri Lanka and Nepal despite domestic pressure to pursue such policy. Quite surprisingly, India seems to have emerged as one of the most active users of AD in the world. The ad valorem equivalents of AD duties vary from about 10 per cent to 80 per cent but most are in the range of 20 to 50 per cent implying that total import duties on imports from foreign firm are subject to the AD duties mostly in a range of 60 to 100 per cent. While AD duties are compatible with WTO rules and serve as 'safety valve', the pervasive use of the 'safety valve' might jeopardise the security of the firms in the international market. One important lesson to be derived from this is that antidumping begets antidumping. By protecting domestic industries through dumping duties is to allow them operate on high inefficiency and high price regime so that whenever such commodities are set to be sold, it must be at lower price than the domestic market. And this means the commodity has invited antidumping duties. An industry that enjoys very high level of protection must export at prices lower than that in domestic market and invite antidumping from competing countries. The vicious circle is very difficult to break.

By and large, the pace of liberalisation in South Asia paid dividends. But the benefits could be increased substantially if (and only if) complimentary polices could come by. There is no doubt that liberalisation of the economy is very much prone to political resistance and one of the ways to reduce the resistance is to raise the share of gains through prudent persuasion of complimentary polices rather than rallying round the rhetoric or putting hands off. After all, good governance is the key to success, be it trade liberalisation or anything else.

Abdul Bayes is professor of economics, Jahangirnagar University