The Region Turns To Market Economics

CHANGING ECONOMIC and political systems in India, Pakistan, Bangladesh, Nepal and Sri Lanka are providing the United States with opportunities to reinvigorate diplomatic and commercial relations in south Asia. Despite democratic and market reforms in the subcontinent, U.S. government and business leaders still place a low priority on the region. Further, most attention devoted to the subcontinent focuses on nuclear or strategic issues, which, while certainly important, are not the only U.S. interests in the region.

In recent years India’s democracy has survived ongoing separatist and communal violence and Rajiv Gandhi’s assassination; Pakistan has held two national elections and, while the civilian democracy is still tenuous, it remains intact; Bangladesh overthrew its military leadership and established a parliamentary democracy; and Nepal has created a constitutional monarchy and held legislative elections.

On the economic side, governments in south Asia have realized that insular, state-run economies have not achieved the levels of growth needed to catapult their large populations out of poverty. Instead these policies isolated their countries and denied them the benefits of international trade and investment. While isolationism may have seemed an attractive course, political and business leaders across the region now acknowledge the need to integrate into the global economy.

In the past the United States had supported autocratic regimes in south Asia, primarily for strategic reasons. In today’s post-Cold War environment Washington is largely neglecting the region even though it now better meets American democratic standards. Similarly, the United States needs to do more to ensure that the region’s economic liberalization is irreversible and that there is no backsliding into the tried and failed socialist past. U.S. policymakers do not fully appreciate the potential impact of south Asian trends on America’s long-term economic interests.

Struggle to Sustain Fragile Democracies

DESPITE EXTRAORDINARY challenges, India’s democratic institutions have functioned relatively well since the country achieved statehood in 1947. Having faced partition, numerous internal separatist movements and other militant activities within its borders, India’s democracy has endured.

One of the most telling signs of the strength of India’s system was its ability to complete the electoral cycle interrupted by Rajiv Gandhi’s assassination in June 1991. While many observers predicted political and social chaos in the wake of Rajiv’s assassination, citizens and leaders alike prevented repetition of the carnage that followed Indira Gandhi’s assassination in 1984.

Another indication of the depth of India’s democracy is its increasing pluralism. In last year’s elections the Hindu Bharatiya Janata Party (BJP) was a major force, winning a significant number of parliamentary seats and state governments and becoming the major opposition party to the Congress (I). Former Prime Minister V. P. Singh’s party, Janata Dal, continues to be vocal if splintered, as are numerous regional parties and leftist groups, including two communist parties. Just as significantly the Congress (I) itself appears to be becoming more democratic. Internal party elections were held earlier this year for the first time in more than 20 years.

India still faces numerous challenges to its democracy. Major separatist disputes, especially in Kashmir and Punjab, are clearly the most dangerous. Religious, communal and caste violence have already brought down one government (that of V. P. Singh) and could threaten others. But there are more mundane problems as well. Corruption is still rampant in many party and government cells. Votes are bought and protesters paid to agitate. Numerous middle-class voters and business leaders feel alienated from the system and express disdain for politicians. Yet India appears able to manage such challenges over the long term.

Pakistan, created in 1947 and reconfigured in 1971 after losing its eastern half, has largely been ruled by a series of military leaders interspersed with volatile experiments with democracy. Pakistan’s democratic institutions have not proven resilient; they have regularly fallen prey to the ascendent political or military leader.

Pakistan’s recent record mirrors the fragile restoration of its democracy. After General Zia ul-Haq’s death in 1988, Ghulam Ishaq Khan became president through constitutional procedures, though clearly with the military’s support. Elections were held as scheduled that November, during which the Pakistan People’s Party (PPP) won a plurality of seats and Benazir Bhutto was elected prime minister. Bhutto subsequently was ousted from office 1990 by questionable means on controversial charges of corruption and mismanagement—but even in this case constitutional procedures were generally followed. Most observers considered the elections held later that year to have been free and fair. Prime Minister Nawaz Sharif of the Islamic Democratic Alliance was elected, and he cobbled together an impressive if uneasy governing coalition.

Yet Pakistan’s constitutional system seems to be under constant threat. Prime Minister Sharif has lost two important members of his coalition after contentious disputes, and his party’s relations with the opposition PPP are venomous. Indeed, unlike India, there is every reason to be concerned that Pakistan’s democratic structures may not be able to withstand further challenges. First, Pakistan confronts well-armed separatist movements and "bandits" that threaten citizens, the government and the military. Second, party politics are even more volatile than in India. Third, military intervention always looms as a means to restore order to both the country and the government; most would agree that the military remains Pakistan’s most durable institution.

Despite the continuing clout of Pakistan’s military, its overt return to power seems unlikely. There is little evidence that the army—with executive as well as military power—could better contain problems in volatile regions, such as in Sind. Further, the United States has made clear that it would not welcome another military takeover in Pakistan. The U.S. aid cutoff stemming from Pakistan’s development of nuclear weapons has diminished American influence in Pakistan. However, Pakistan wants to be a global player both politically and economically, and it needs American support to succeed. The U.S. stance on democracy, therefore, has become a part of Pakistan’s political debate.

Bangladesh has returned to democracy after a long hiatus under the dictatorial rule of General Hussain Muhammad Ershad. During a series of dramatic events in 1990, the opposition Awami League and Bangladesh Nationalist Party (BNP) organized protests against the Ershad government. Strong student protests and a violent general strike forced Ershad to call a state of emergency. Unable to control these forces, he was compelled to resign.

When parliamentary elections were set for the following February, the BNP achieved a plurality, and Begum Khaleda Zia was appointed prime minister. One of the government’s first initiatives was to amend the constitution to shift from a strong presidential system to a parliamentary system. A nationwide referendum approved the revision by September 1991, only one year after the outset of demonstrations that had displaced Ershad.

Bangladesh’s success in eliminating its dictatorship has not established a solid democratic foundation for the government. Among their many problems Bangladesh’s political parties have come under fire for lack of internal democracy and inability to control violent student factions. Bangladesh’s severe economic constraints will also continue to hamstring the government.

In perhaps the least publicized overthrow of a government the people of Nepal in 1990 ended the country’s monarchical and "partyless" democracy system and established a multiparty democracy with a constitutional monarchy. After a series of sometimes violent demonstrations and general strikes led by banned political parties, urban intellectuals and the middle class, opposition leaders succeeded in convincing King Birendra to allow parties to exist, to appoint an opposition party leader as prime minister and to agree to hold elections and promulgate a new constitution. In a surprisingly short period of time leaders rewrote the constitution, limited the powers of the monarchy, established a parliamentary system and scheduled elections. National legislative elections were held in May 1991, and the Nepali Congress Party won a decisive victory. The country’s fundamental unfamiliarity with democracy as well as the economic burdens of severe poverty and totally inadequate infrastructure are the main threats to Nepal’s fragile democracy.

Need for Foreign Capital

SOUTH ASIAN GOVERNMENTS have recognized that improving their economies must be their foremost priority to ensure stability at home. They have largely accepted that their inward-looking, centrally planned economic policies have failed, while the countries that have prospered around the globe are those with dynamic private sectors. Taking these factors into account, leaders in the subcontinent have instituted economic policies that reduce the public sector’s role in the economy, decrease state regulation of private industry and embrace the global economy by encouraging foreign investment and promoting exports.

Indian Prime Minister P. V. Narasimha Rao announced just weeks after his election in June 1991 a surprising series of policies that shook the Indian economy to its roots. The government devalued the rupee, abolished most industrial licenses and offered automatic approval for foreign investments and technology agreements in priority, sectors. American and Indian business leaders praised these initiatives.

Over the past year the Indian government has implemented additional liberalization policies. The rupee has been made partially convertible, tariffs have been reduced, capital markets have been partially opened, and import license requirements have been removed for most items. The government has attempted to reduce the budget deficit and to raise foreign exchange reserves, which had been dangerously low.

But now India’s reforms have slowed considerably. Underlying political and economic problems threaten to limit the impact of the new policies and the continuation of the reform’s quick pace. The financial scandal that rocked India’s stock markets earlier this year has provided ammunition to opponents of reform who warn of the dangers of deregulation and reliance on the private sector. Clashes between Hindus and Muslims in the state of Uttar Pradesh over construction of a temple on the site of a mosque continue to occupy the Union government, as does recurring ethnic violence in Punjab and Kashmir.

India also faces significant economic challenges. Growth slowed last year due to restrictions on imports, lost markets in the former Soviet Union and high interest rates, and is barely recovering. Inflation has been high by Indian standards, but it has eased to single digits and appears manageable. Exports have not expanded at rates predicted by the government, while imports have grown, and maintaining the budget deficit at a level agreeable to the International Monetary Fund is a constant struggle. To date India has kept these difficulties under control, but has not yet solved the basic problems of its economy, including a system of massive subsidies and a vast array of inefficient state-owned industries.

The responses from the United States and other industrial countries to India’s reforms are crucial. India needs the capital and jobs from increased investment and trade to assure continued support for its reforms. In the first 15 months since the reforms were announced India has approved over $1 billion of foreign investment; by comparison in 1990 it had approved only $90 million of investment. Still the figures are low for a country of India’s size; in the first quarter of 1992 China received $6.5 billion worth of foreign investment. While India’s dramatic turnaround reflects some success in boosting investor confidence, foreign companies remain wary of a slowdown in the reforms and of excessive bureaucratic interference.

In the months before India initiated its reforms Pakistan had already begun to restructure its economy. Immediately after assuming office in November 1990 Prime Minister Sharif announced a bold series of reforms to reduce government involvement in the economy, to privatize public-sector companies and to encourage private-sector growth. The government also opened most sectors to foreign investors and reduced financial and bureaucratic obstacles to businesses. The Sharif government is striving to attract greater foreign inflows of capital, technology and jobs to invigorate Pakistan’s economy.

While these reforms should lay the foundation for better long-term economic prospects, Pakistan’s economy faces many immediate financial and political hurdles. The budget deficit still consumes a significant portion of GDP due to heavy defense spending and debt repayment, and an inability to slash spending will threaten future loans from international lenders. The trade deficit has also widened and foreign exchange reserves have dropped.

Nevertheless Pakistan has had some significant achievements. In 1991 it had the highest growth rate in south Asia at 6.4%. Many state enterprises have been privatized, although not at the anticipated rate, and a number of major infrastructure projects are under way, including desperately needed power plants. However, devastating floods have threatened many of Pakistan’s recent gains.

Pakistan’s political instability will provide the biggest obstacle to effective economic reform. If the government is not able to implement its policies, its announcements will have no value. If the military threatens the government, confidence will plummet. If Pakistan continues to be racked by violence, investors will lose interest regardless of new policies. A precondition of economic growth is political stability and an ability to focus attention and resources on issues of development.

U.S. companies, currently the leading foreign investors in Pakistan, have benefited from improved customs procedures and decreased government regulations, as well as the ability to hold dollar accounts, to expand investments and to own 100 percent equity in direct investments. Greater international commerce with Pakistan would help cement economic reforms and create a more prosperous state that could play a larger role in the global economy.

Sri Lanka, Bangladesh and Nepal have also fully participated in the regional trend toward liberalized economies. Their policies are characterized by reduced government regulation, efforts to strengthen the financial sectors, increased infrastructure investment, encouragement of foreign investment and export promotion. More so than in India and Pakistan, these governments have maintained a strong state presence in certain sectors and plan to keep a "mixed economy" to supplement their still developing private sectors.

As in India and Pakistan greater foreign investment or trade would provide a boon to the economies of these three smaller countries and contribute to their growth and stability. The U.S. government is making some effort to develop commercial ties in the region. Earlier this year the U.S. and Sri Lankan governments signed bilateral tax and investment treaties and an intellectual property rights agreement. In 1991 the U.S.-Bangladesh bilateral investment treaty was also concluded. And in Nepal the U.S. embassy has made it a priority to make American companies aware of specific business opportunities, particularly in major infrastructure projects.

Is the Reform Process Irreversible?

NOW THAT MARKET forces have been unleashed, India and other south Asian economies have the potential to become major players in global trade. However, the governments in the region must continue to deregulate and open their economies to achieve the full benefits of liberalization. In this regard, for example, the Indian government has yet to enunciate its long-awaited "exit policy" to shed money-losing state enterprises. In Pakistan, the region’s other economic power, the government must gain control of its budget and channel funds to more productive uses.

Regional leaders are quick to claim that the reform process, given the economic baggage of their socialist past, is necessarily slow but "irreversible." In fact many of these leaders now face politically excruciating decisions of laying off a massive number of workers in state-owned enterprises and of cutting subsidies, including to the agrarian majority of their populations. Their reluctance is heightened by unsettled domestic political conditions across the region.

The United States can assist the region in overcoming its numerous economic challenges. But to do so the U.S. government at the highest levels must acknowledge its interests in promoting greater prosperity in the subcontinent and in developing a stronger, more active policy toward the region. There are a number of simple yet effective options available to Washington.

An effective means of conveying U.S. interest would be a presidential trip to south Asia early in the new term. A trip to the region would show that south Asia, long seen as a backwater, is a priority to the Clinton administration. The mission would also raise American awareness of developments in south Asia and provide an important opportunity to encourage greater trade and investment. Beyond the White House, top officials in the State and Commerce departments should also devote greater attention and resources to efforts in the region.

Second, the United States should establish a more constructive relationship with the countries of south Asia, one based on shared democratic principles and economic opportunities. Washington must discard its Cold War approach to relations with south Asia and stop viewing the region primarily in terms of its potential threat to U.S. interests. The United States should recognize that democracy and market-oriented reforms underway in the region are consistent with U.S. interests. Washington’s most effective course is to raise south Asia’s profile in the corporate community and to direct greater resources for commercial programs in the subcontinent.

Third, U.S. businesses should pay more attention to long-term growth prospects and build on America’s advantage as the region’s largest trading partner. A rapidly growing south Asian middle class—coupled with industries that demand investment and technology—is helping to create one of the world’s most important emerging markets, and an economic expansion that improves the region’s living standards will lead to greater political stability. For U.S. political and business circles alike south Asia deserves a higher priority.

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  • Charles H. Percy, a former U.S. Senator from Illinois and Chairman of the Senate Foreign Relations Committee, is Chairman of the Technology Transfer Committee of the U.S.?India Business Council. He is also president of an international consulting firm based in Washington, D.C.
  • More By Charles H. Percy