Economic growth in South Asia, while still strong, has declined to 6 percent in 2004, from 7.5 percent in 2003, according to the Global Economic Prospects 2005: Trade, Regionalism and Prosperity, a report launched by the World Bank today. The slowdown in the region can be attributed to adverse weather conditions and a decline in agricultural output due to poor rainfall. For 2005, regional gross domestic product is expected to increase by 6.3 percent.
With regional trade agreements (RTAs) having increased sixfold since the l980s and now covering more than one-third of global trade, the World Bank's report advises countries concluding bilateral and regional trade pacts to keep them "open," so as not to divert trade or cause market distortions that penalise other developing countries.
"Trade as a share of GDP remains smaller in South Asia than in any other developing region," says Shanta Devarajan Chief Economist for the South Asia region in the Bank. "But things are changing, including prospects for greater intra-regional trade as indicated by the recent SAFTA agreement. The challenge is to ensure that regional integration does not occur behind a wall of protection."
Multilateral market openings - which are being sought in the Doha Round of WTO negotiations -hold the promise of greater potential gains to all developing countries, the report says.
"A multilateral agreement is the only way to open agricultural markets and reduce or end subsidies in rich countries, "says François Bourguignon, World Bank's Chief Economist. These reforms are of critical importance to the poor but they are not on the table in regional trade talks."
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Global GDP projections, 2004-2006
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Percent change 2000 2001 2002 2003 2004 2005 2006
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World 4.0 1.5 1.7 2.7 4.0 3.2 3.2
High Income Countries 3.7 1.1 1.3 2.1 3.5 2.7 2.7
OECD countries 3.6 1.2 1.3 2.0 3.5 2.6 2.6
United States 3.7 0.8 1.9 3.0 4.3 3.2 3.3
Japan 2.8 0.4 -0.3 2.5 4.3 1.8 1.6
Euro area 3.7 1.6 0.9 0.5 1.8 2.1 2.3
Non-OECD countries 7.7 -0.9 2.2 3.1 5.9 4.6 4.4
All Developing Countries 5.2 2.9 3.4 5.2 6.1 5.4 5.1
East Asia Pacific 7.2 5.6 6.7 7.9 7.8 7.1 6.6
Europe and Central Asia 6.7 2.8 4.6 5.9 7.0 5.6 5.0
Latin America/Caribbean 3.7 0.3 -0.6 1.6 4.7 3.7 3.7
Middle East/North Africa 3.1 3.4 3.2 5.7 4.7 4.7 4.5
South Asia 4.2 4.7 4.6 7.5 6.0 6.3 6.0
Sub-Saharan Africa 3.3 3.0 3.1 3.0 3.2 3.6 3.7
Memo: Developing excluding 4.7 1.6 2.1 3.8 5.4 4.6 4.3
China/India
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Source: World Bank
Note: GDP in constant 1995 US Dollars
Developing countries' 6.1% growth in 2004 is the best in three decades, but is expected to be moderate. In addition to its analysis of regional trade agreements, the report notes in its review of global prospects that 2004 is likely to be the best year for growth in developing countries since 1974.
Growth is estimated to be 6.1 percent, due to a strong cyclical global rebound from the 2001-02 slowdown and a solid performance spanning all regions.
Global growth in 2004 is also strong at 4.0 percent, and the report forecasts that it will decelerate to 3.2 percent in 2005, and 2006. Slower growth is expected in developing countries too, down from 6.1 percent in 2004 to a projected 5.4 percent in 2005 and 5.1 percent in 2006.
East Asian growth will continue to outrun that of other regions, if at a somewhat slower pace, with 7.1 percent growth in 2005. South Asia is close behind with growth of 6.0 percent expected.
China's growth is forecast to slow modestly, in response to the government's effort to prevent overheating; similarly, East Asian countries that had gained from a 30-percent increase in Chinese import demand this year, are also expected to experience moderate growth.
Russia and the oil-producing countries of the Middle East and North Africa, beneficiaries from high petroleum prices in 2004, are expected to grow at about the same pace in 2005 as oil prices move downwards.
In the medium-long run, the report predicts that developing countries could nearly double their 1990s growth rate as their investments in structural reforms begin to pay dividends. A sustained improvement in their macroeconomic stability, greater flexibility in moving resources to competitive opportunities, a better investment climate, and further reductions in reducing trade barriers, together with continued progress in the transition countries, should help developing countries reach an average annual per capita growth rate of 3.4 percent between 2006 and 2015, up from less than two percent in the 1990s.
The report warns that some countries, particularly in Africa, have not participated in this higher growth.
This upbeat forecast is also vulnerable to risks, such as high and volatile oil prices, abrupt increases in the interest rates associated with adjustments in the US current account and government deficits, and possible stumbles in the effort to cool China's rapidly growing economy. But the report sees these risks as manageable and concludes on a positive note.
The rapid growth of developing economies, most of them concentrated in East and South Asia, has produced a spectacular drop in poverty, though some countries remain seriously off-target.
Use "open regionalism" to complement unilateral trade reforms, and multilateral reforms to gain broad market access, countries urged.
RTAs are most effective when they complement a unilateral and multilateral trade strategy and anchor domestic reform programs to improve competitiveness and reduce poverty, the report states.
"Most trade liberalisation - some two-thirds of the average reduction in tariffs since 1983 - has occurred through unilateral government reform programs. Governments want to make their economies more efficient, "said Uri Dadush, Director of Development Prospects, and the International Trade Group at the World Bank.
"Whether we are talking about Chile, China, or more recently India, Egypt and Madagascar, governments choose to lower trade barriers to increase import competition, bring in more technology embodied in imports, and raise productivity," Dadush said.
"This spurs exports and growth. If in the process, they can get their trading partners to do the same as part of a global or regional deal that gives their exporters more market access abroad, the prospects for poverty reduction are improved."
The report says that the key ingredients of RTAs that promote development include low external border barriers, promotion of new cross-border competition, non-restrictive rules of origin, few sectoral and product exemptions, and more open services markets.
Effective RTAs can help reduce regional political tensions, exploit economies-of-scale in infrastructure provision, and lead to joint programs to improve border crossings.
Successful experiences range from the NAFTA to the EU's agreements with Eastern European countries, and the ASEAN Free Trade Area in East Asia. But all arrangements have room for improvement. Indeed, the world's most successful case of deep integration - the European Union - has evolved progressively and at times fitfully toward greater integration.
"Neither North-South bilateral agreements nor South-South arrangements get universally high marks," said Richard Newfarmer, Economic Adviser in the Bank's Trade Department and lead author of GEP 2005. "US and EU bilateral agreements often fall short of full free trade because they exclude sensitive products, commonly agriculture, or they adopt restrictive rules of origin that effectively deny market access.
South-South agreements are sometimes more liberal in goods trade, but rarely expand competition in services and often lag in implementation. And few agreements seize the opportunity to provide for temporary movement of workers."
In South Asia, external MFN liberalisation has lagged behind other regions, and external tariffs often remain high. Together with regional conflicts, this has impeded trade integration in these regions. "Improved Indo-Pakistan relations, however, open opportunities to promote development through greater regional integration," says Devarajan.
"The South Asian Free Trade Area could form part of a strategy for greater openness, but it is likely to be successful only if it learns the lessons of failed agreements in other parts of the world."
"Open" regional agreements can complement multilateral liberalisation, the report argues. Joint reforms of customs at the border can cut costs of trading that at times are more onerous than tariffs, but implementation often lags.
GLOBAL ECONOMIC PROSPECTS 2005
REGIONAL TRADE PERSPECTIVES: The South Asian Free Trade Area (SAFTA), proposed in January 2004, would spur intra-regional trade, provided that most products are included and the regional strategy is embedded in the larger trade strategy of gradually opening to international markets. Trade as a share of GDP remains smaller in South Asia than in any other developing region.
Gradual expansion of trade ties between India and Pakistan as a consequence of steps toward implementing the proposed SAFTA agreement may anchor the recent rapprochement. Expanded trade creates new constituencies favouring reduced tensions. However, a lesson of the study is that RTAs can only play this role if they are well designed and create trade rather than divert it.
No South Asian country has a bilateral trade deal with a developed country. India has concluded, or is negotiating, limited arrangements with Mercosur and Thailand.
Aside from Sri Lanka, no South Asian country had liberalised trade or FDI rules prior to the 1990s. Removal of the most extreme forms of anti-export bias and gradual domestic reforms, together with textile preferences, produced a rapid expansion in garment/textile exports from South Asian countries. This prompted growth in exports overall since 1990, and in the exports' share of South Asia's GDP.
South Asian exports, as a share of world trade, remained low up to 2000, as the region's countries maintained the world's highest levels of average applied tariffs. But this is changing. Nepal launched trade liberalisation in the early 1990s, and Sri Lanka and Pakistan have begun reducing border barriers and increasing external trade.
India began to reduce border protection in the early 1990s, and in early 2004, announced up to one-third tariff cuts. Bangladeshi border protections remain among the world's highest, although reductions were announced in 2004. South Asia remains only minimally integrated in world capital markets. Net inflows of FDI, although higher than the early 1980s, are less than 0.8 percent of GDP, the lowest among developing regions.
REGIONAL ECONOMIC PROSPECTS: GDP in South Asia is estimated to have slowed in 2004, if from a rapid pace, increasing by six percent, down from 7.5 percent in 2003.
India's services sector made strong advances, supported by productivity gains and greater market penetration. The manufacturing sector continued to post high growth.
Excluding India, growth in the region is projected to rise to 6.0 percent in 2004 from 5.6 percent in 2003, supported by robust manufacturing in Bangladesh and Pakistan, and strengthening services and agricultural sector growth in Nepal and Sri Lanka.
Donor assistance and incipient peace, combined with a recovery in agriculture after a prolonged drought, helped boost real GDP growth in Afghanistan by an estimated 16 percent, excluding opium (which accounts for about one-third of output).
Regional GDP is forecast to accelerate expanding by 6.3 percent in 2005, before moderating somewhat in 2006.
The acceleration is largely driven by an anticipated recovery of agricultural growth in 2005; it is forecast despite slower GDP and trade growth elsewhere in the world.
Long-term growth in South Asia is forecast to average about 5.5 percent during 2006-15 as the contribution to growth from the private sector accelerates.
Per capita incomes are projected to advance significantly in the coming decades, expanding by an average of 4.1 percent per year for the period 2006-15 as reforms quicken and begin to pay productivity dividends.
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