South Asia Economic Journal current issue

Adverse Selection Effect for South Asian Countries in FTA Formation: An Empirical Study on the Determinants of FTA among the Bilateral Trading Partners

Jayathilaka, R., Keembiyahetti, N. — Thu, 01 Oct 2009 07:51:59 PDT

This study examines the economic and non-economic factors governing the decision of forming Free Trade Agreements (FTAs) between two non-zero trading partners by estimating a Probit model using 9,178 country pairs having 705 active and operational bilateral FTAs. This study works on the implied hypothesis that FTA is an endogenously determined variable dependent on a number of economic and non-economic factors which are usually omitted from gravity type trade models. The study finds economically important and statistically significant evidences that the likelihood of forming an FTA by a pair of countries is positively related to the economic mass of the partners, similarity in economic size, differences of relative factor intensity, political stability, past import tariffs and the existence of FTAs in the close neighbourhood, whereas it is negatively related to the distance, economic remoteness and geographic continuity. Based on these findings, this study provides a good explanation as to why South Asian Association for Regional Cooperation (SAARC) countries are still far behind the FTA negotiation process and how SAARC countries are subject to adverse selection effect by rest of the world.

Indian Economic Reforms and Foreign Direct Investment: How Much Difference Do they Make to Neighbours?

Vadlamannati, K. C. — Thu, 01 Oct 2009 07:51:59 PDT

The unprecedented emergence of a country as large as India in the South Asian region raises the issue of how it will affect neighbouring economies in terms of attracting FDI inflows. Do huge FDI inflows of India lead to ‘investment creating effect’ or otherwise for its neighbours? If so, is this positive impact conditioned by local economic reforms in India? These are the issues we try to explore empirically using data for four South Asian economies (Pakistan, Sri Lanka, Bangladesh and Nepal) from 1975 to 2006 and control for other key determinants of FDI inflows. Using the Chantasasawat et al. (2004) and Mercereau (2005) approach, we make use of five different alternative measures to create ‘India effect’ and examine its impact on FDI inflows of its neighbours. Using all the five measures, the results suggest that the India effect is positively related to the levels of FDI inflows of its neighbours. There is an evidence to support that the positive impact of Indian FDI inflows on its neighbours is conditioned by Indian economic reforms. Also found is the negative effect of reversal of Indian reforms on neighbours’ FDI inflows.

Gains from the Liberalization of Temporary Migration: The Case of India

Ahmed, S. A., Walmsley, T. L. — Thu, 01 Oct 2009 07:51:59 PDT

We examine the potential gains for India from increased temporary migration of skilled workers from India to major recipient-countries of Indian migrant workers, in light of potential productivity gains from return migration. The article uses the GMig2 Global Bilateral Labour Migration Model and its supporting database to explore the impact on the Indian economy of liberalizing the temporary movement of skilled workers; and compares the welfare effects of this liberalization to those from domestic services sector liberalization in India. The results show that the welfare of Indian workers remaining behind in India improves as a result of temporary skilled labour migration. Although there is a welfare loss arising from out-migration, this is outweighed by the substantial increase in remittances back to India. There is also a clear improvement in total real income from the increased productivity brought back to India by the returning workers.

Modelling Trade Sector and Trade Shocks in a Small Open Economy: The Case of Sri Lanka

Jayawickrama, J.M. A. — Thu, 01 Oct 2009 07:51:59 PDT

The article examines the impact of external trade shocks on the economy of Sri Lanka, a small and open developing economy with high external trade intensity. Given a variety of specifications, we favour estimating both export demand and supply functions and an import demand function. Export demand depends on own price, world export prices and world income whereas export supply depends on own price, input prices and production capacity. Import demand is dependent on income and the relative price. Combining the trade sector with the rest of the economy, the article performs simulation experiments on external trade shocks. Results reveal that an increase in import prices has a significant impact on nominal variables and improves the current account of the balance of payments. An increase in world income has a highly persistent positive impact on the current account. Further, as these trade shocks affect the nominal sector of the economy greatly, measures should be taken to cushion any associated destabilizing impact on the economy. The results also imply that export sector businesses should have the flexibility to vary the production capacity in the face of such shocks.

Economic Growth in India Revisited: An Application of Cointegration and Error Correction Mechanism

Haldar, S. K. — Thu, 01 Oct 2009 07:51:59 PDT

This article tries to examine the relevance of the three distinct types of the growth models, namely, physical capital accumulation-led growth, export-led growth and Lucas-type human capital accumulation-led growth in India taking a long-time series data from 1950–51 to 2003–04. Employing the Johansen's cointegration and error correction model, we find that human capital investment plays a crucial role both in the long run as well as in the short run. The export-led growth hypothesis is partially valid whereas the physical capital investment-led growth appears to be insignificant in our findings.

Financial Liberalization and Performance in Sri Lanka: The ARDL Approach

Paudel, R. C., Jayanthakumaran, K. — Thu, 01 Oct 2009 07:51:59 PDT

From the 1950s to the early 1970s, Sri Lankan governments pursued controls on the financial sector and have further reduced controls since 1977. This article links those financial sector reforms (falling controls) and the financial sector performance of Sri Lanka by testing hypotheses estimating cointegration with the ordinary least square (OLS)-based auto regressive distributed lag (ARDL) approach. Results show limited support for the liberalization and efficiency hypotheses that falling controls are associated with widening the financial sector and motivating investments. Results provide no support for the hypotheses that falling control is associated with deepening and improving the financial sector.

Decentralization of Governance and Economic Development: The Sri Lankan Experience after Establishment of Provincial Councils

Herath, T. N. — Thu, 01 Oct 2009 07:51:59 PDT

Economists have theoretically shown that decentralization of governance promotes growth and development. However, this is not so according to the empirical evi-dence which sometimes shows divergent results. In the meantime, more and more countries decentralize their governance. This article reviews Sri Lanka's experience of decentralization during the past 15 years. The article compares the pre- and post- decentralized economic status under Provincial Councils and examines the relationship of the degree of decentralization with poverty and the per capita income of the country. Findings show that the actual degree of decentralization is very low and it is not significantly conducive to increase per capita income, there is a huge imbalance in development among regions, and public officials at lower layers of government are not competent to reap the benefits of decentralization. For the effective functioning of decentralized governance in developing countries, the article recommends, first, to empower lower layers of government with more clearly defined functions that do not overlap with the central government; second, to develop a proper mechanism enabling lower tiers of government to reap the benefits of decentralization; third, to take prompt action to enable public officials to be familiar with the decentralized role of the state and principles of public expenditure.

Prospects and Problems in Promoting Tourism in South Asia: A Regional Perspective

Rasul, G., Manandhar, P. — Thu, 01 Oct 2009 07:51:59 PDT

South Asia possesses many valuable tourist resources and attractions, which could be important vehicles for reducing the widespread persistent poverty in South Asia. However, the potential of tourism has remained largely unrealized for several reasons. Recently, several organizations, including the South Asian Association for Regional Cooperation (SAARC), have focused on promoting intra-regional tourism by utilizing common resources, shared culture and common physical infrastructures. This article examines the progress made in promoting tourism in South Asia and explores the factors that facilitate and constrain the promotion of tourism in South Asia. The analyses show that despite several initiatives, tourism's contribution to regional national economies, in terms of employment generation, foreign exchange earnings and national revenue, has remained minimal. Complicated travel procedures, inadequate infrastructure and transport facilities and the poor quality of management and service, together with a negative image arising from safety and security concerns, have constrained intra-regional tourism. This article argues that inadequate political commitment and bureaucratic meandering are the primary obstacles in promoting tourism and economic integration in South Asia. Recommendations for removing the physical and institutional barriers to intra-regional tourism are outlined.

Indian Stakes in the Global Coconut Scenario by the Turn of the Century: An Empirical Investigation

Lathika, M., Kumar, C.E. A. — Thu, 01 Oct 2009 07:51:59 PDT

The study sought to identify the prospective coconut producing countries that put up formidable trade competition to India, and to examine the growth performance of coconut in major producing countries, especially the ones identified to be real challengers to Indian interests. The cluster analysis of trend data for 18 years till 2002 on five parameters and with reference to eight dimensions of coconut performance delineated the key players in the international coconut market. Philippines, Indonesia and India formed the cluster of major stakeholders. India fared better than both the other countries in the major cluster, in respect of area, production and yield; and therefore, it should enjoy a comparative advantage. However, the acreage growth in India was stagnant during the post-liberalization phase and it does not appear to take advantage of other options available to it by moving up the value chain and thereby resisting the market pressure on domestic prices in an open economy environment. This resulted in a price crash of coconut products at the dawn of the new century.

South Asia Development and Cooperation Report 2008

Batra, A. — Thu, 01 Oct 2009 07:51:59 PDT

The Politics of Foreign Aid in Sri Lanka: Promoting Markets and Supporting Peace

de Mel, D. — Thu, 01 Oct 2009 07:51:59 PDT

Book Reviews

Thu, 01 Oct 2009 07:51:59 PDT