Unlocking potential in South Asia
Rebound from Covid could be fragile and uneven if intraregional investment and business connectivity remain weak.
South Asia, home to nearly two billion people, has been among the fastest-growing regions in the world over the past decade. Yet intraregional trade is well below expected levels, suggesting that regional spillover from the growth of some individual countries has been limited.
Given that trade is a conduit for growth, job creation and poverty reduction, understanding and addressing the factors that have held back greater engagement is important, say experts.
In its latest South Asia Economic Focus report, the World Bank forecasts that the region’s average annual growth in 2020-23 will be 3.4%, which is less than what it was in the four years prior to the coronavirus pandemic. Inward and outward intra-regional foreign direct investment (FDI) is only around US$3 billion, less than 1% of all inward FDI worldwide. Other indicators, such as women-led businesses and intra-regional investments, are even less promising.
South Asia’s recovery will depend to a large degree on fully embracing global, regional and local business opportunities. However, intraregional engagement is still limited to about 5% of total trade, compared to 50% in East Asia and 60% in Europe.
Regional economic experts say intraregional trade and investment will be critical to providing the much-needed buoyancy to inclusive economic recovery across all sectors, particularly the rapidly growing services sector, as pandemic uncertainty continues to disrupt global value chains.
Significantly, rising demand for goods and services within the region is creating significant opportunities for South Asian businesses that want to expand and diversify. Yet limited knowledge about the economic and investment landscape in neighbouring countries, along with low bilateral trust, further increase costs and restrict engagement.
Despite the constraints, there are some successful intraregional ventures across various sectors. These pioneers tend to be prior exporters; well-networked, often with strong social and ethnic connections, and are high-productivity businesses with surplus investment funds.
The opportunities and challenges in South Asia were highlighted during a recent webinar held by the World Bank Group in collaboration with its investment arm, the International Finance Corporation (IFC). Leading investors and policymakers discussed how intraregional investors can be strengthened to boost a robust recovery and economic growth in the region.
A new World Bank report, Regional Investment Pioneers in South Asia: The Payoff of Knowing your Neighbours, explores the potential of intraregional investment, as well as some constraints that have received little attention in the past.
“For South Asia, there is potential that has been unrealised, which is the potential for regional trade to provide the buoyancy that is often absent in world trade,” said Sanjay Kathuria, co-author of the report and a fellow at the Washington-based Wilson Center.
“There should be a receptivity and an energy to explore the region deeper and with renewed motivation, because the regional opportunities have come knocking at our door again.”
Intraregional investment in South Asia is relatively small at only $3 billion in 2017. Inward FDI and outward FDI accounted for only 0.6% and 2.7% respectively of the global totals.
Nevertheless, there are some encouraging signs. For example, businesses with small trade volume may invest in liaison offices, and investments are also taking place in service operations and production.
Investments from smaller nations are growing, although investment from India, by far the largest economy in the region, still predominates. The report documents companies’ gradual approach to investing outside their home markets, for example by learning from their prior experience as exporters, or by starting out with a very modest commitment.
“Pakistan has not been receiving the amount of foreign direct investment it deserves,” says Fareena Mazhar, secretary of the Pakistan Board of Investment. SUPPLIED
The report highlights two understudied factors that may be keys to unlocking the potential of regional trade and value chains in South Asia: knowledge connectivity and intraregional investment.
A survey of 1,274 firms across the eight countries of South Asia assessed “knowledge connectivity”, or how much businesspeople in one country knew about another country. The average score among country pairs was only 1.9 out of 4, falling between “not at all” and “not very well” informed.
Information and network frictions, along with bilateral mistrust, reflect the high costs of search, matching and contracting across borders, as well as market failures in providing channels to alleviate these frictions.
Knowledge connectivity can have different roots. Social and ethnic networks, for example, tend to be linked to increased cross-border investment. For services FDI, such networks are even more important than factors such as productivity improvements.
In general, investments grow gradually as firms learn from exporting and from affiliated firms in a conglomerate.
Despite the handicaps, some regional investment pioneers in South Asia have succeeded in establishing profitable ventures in different sectors.
When it comes to improving the basic infrastructure to support investment, a regional power trade focusing on renewable energy sources such as wind could strengthen the energy mix of participating countries, said Hector Gomez Ang, regional director for South Asia of the IFC. An efficient power trade structure and clear regulations could also help individual countries overcome energy supply shortages, which are a major barrier to investment.
Transport connectivity, from port terminals to roads and railways, is also crucial. Meanwhile, some emerging businesses can play a role in leading digital connectivity, for example electric vehicles.
“I feel there is a tremendous amount of opportunity in the region if people are just able to have an open mindset about what they want to explore,” says Ahsan Khan Chowdhury, Group CEO of PRAN-RFL Group of Bangladesh. SUPPLIED
However, more work is needed in some countries to create the business environment to support the growth of intraregional investment in the post-Covid era. South-South cooperation can play an essential supporting role in clearing the way for companies that want to enter other markets within the region and beyond.
“We have high hopes for private equity and venture capital. There will be a lot of intra-South Asian opportunities,” said Mr Gomez Ang. “We have both the regional and global experience that investors want and can diversify risks. It will help open up more markets, particularly on the tech side.”
Pakistan is one country that has invested significantly in the region. Its earliest intra-regional investment dates back to 1951 with a branch of Habib Bank, the country’s largest lender, in Sri Lanka. But inward FDI to Pakistan has fallen short of expectations.
“Pakistan has not been receiving the amount of foreign direct investment it deserves,” said Fareena Mazhar, secretary of the Pakistan Board of Investment, adding that terrorism and energy shortages have been the main concerns among investors in the past.
These issues have been resolved, she said, adding that a liberal investment regime allows total repatriation of profits and investment in all sectors. The country is hopeful of attracting more interest, especially in special economic zones where a 10-year exemption from income tax is offered, along with tax free imports of machinery.
High incentives and low-interest loan programmes are also offered for the export sector. Further legislation is pending to improve the ease of doing business in Pakistan.
Ms Mazhar also said new policies on electric vehicles and mobile phone manufacturing had been welcomed by investors. During the first 10 months of this year, handset production by local plants almost doubled from a year earlier to 18.9 million, against imports of 45 million. Samsung of South Korea recently opened a new joint-venture plant in Pakistan with a production target of 3 million units a year once it reaches full capacity.
In addition to Samsung, another big name entering the Pakistani market is the Japanese apparel giant Uniqlo. “Whoever comes to Pakistan, never leaves Pakistan,” said Ms Mazhar.
During the Covid pandemic in Pakistan, over 15 million beneficiaries received one-time emergency cash grants, and the additional money flowing into the economy has helped SMEs to recover.
“We have high hopes for private equity and venture capital. There will be a lot of intra-South Asian opportunities,” says Hector Gomez Ang, regional director for South Asia of the International Finance Corporation. SUPPLIED
Despite restrictive FDI regimes, low levels of trust among countries, limited financial resources and knowledge and networking gaps, some regional investment pioneers have successfully established profitable ventures.
PRAN-RFL Group, the largest food and beverage brand in Bangladesh, is among the success stories.
Group CEO Ahsan Khan Chowdhury looks at the pandemic as a boon. It has given his company a tremendous boost in terms of consumption of its wide range of products.
The conglomerate, established in 1981, pioneered agribusiness in Bangladesh by providing farmers with guaranteed prices (PRAN stands for Programme for Rural Advancement Nationally). In 2015, the company opened a 2-billion-rupee ($26-million) production facility in Tripura state in northeastern India, seven years after the Delhi government lifted a ban on direct investment from Bangladesh. PRAN also started exporting via river routes to India from Bangladesh in March 2021.
“I don’t consider India as a country, but a continent. For a small company operating from Bangladesh, India is a world out there that we are there to explore,” Chowdhury said during the webinar.
He said the government of Nepal had also given the green light to imports of PRAN products, adding that a domestic plant would be operating soon. His company also continues to export a lot of consumer products to Afghanistan despite the continuing turmoil there. He hopes to expand business investment in Pakistan as soon as duty structures are resolved.
“I feel that there is a tremendous amount of opportunity in the region if people are just able to have an open mindset about what they want to explore,” he said. “I think there’s a wonderful world out there that has to be explored. Surely, we are able to connect more and more regionally.”