Unlocking the potential in South Asia

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South Asia, home to nearly two billion people, has been one of the fastest growing regions of the world over the past decade. Yet intraregional trade is well below expected levels, suggesting that regional spillovers from the growth of some individual countries have been limited.

Since trade is a driver of growth, job creation and poverty reduction, it is important to understand and address the factors that have held back increased engagement, experts say.

In its latest South Asia Economic Focus report, the World Bank predicts that the region’s average annual growth in 2020-23 will be 3.4%, which is lower than it was in the four years before the pandemic. coronavirus. Intraregional inward and outward foreign direct investment (FDI) is only around US $ 3 billion, or less than 1% of all inward FDI in the world. Other indicators, such as women-led businesses and intraregional investment, are even less promising.

South Asia’s recovery will depend to a large extent on fully exploiting global, regional and local business opportunities. However, intraregional engagement is still limited to around 5% of total trade, compared to 50% in East Asia and 60% in Europe.

Regional economic experts say intraregional trade and investment will be key to providing the momentum needed for an inclusive economic recovery across all sectors, especially the rapidly growing services sector, as uncertainty over the pandemic continues to mount. disrupt global value chains.

Significantly, the growing demand for goods and services in the region creates significant opportunities for South Asian companies looking to grow and diversify. Yet limited knowledge of the economic landscape and investments in neighboring countries, as well as low bilateral trust, further increase costs and constrain engagement.

Despite the constraints, there are successful intraregional businesses in various industries. These pioneers tend to be former exporters; well networked, often with strong social and ethnic ties, and are high productivity companies with excess investment funds.

The opportunities and challenges in South Asia were highlighted during a recent webinar hosted by the World Bank Group in collaboration with its investment arm, the International Finance Corporation (IFC). Key investors and policymakers discussed how intraregional investors can be strengthened to drive strong economic recovery and growth in the region.

A new World Bank report, Regional Investment Pioneers in South Asia: The Payoff of Knowing your Neighbors, explores the potential of intraregional investing, as well as some constraints that have received little attention in the past.

“For South Asia, there is a potential that has not been realized, that is, the potential of regional trade to provide the dynamism that is often lacking in global trade,” said Sanjay Kathuria, co-author of the report and researcher in Washington. based at the Wilson Center.

“There should be a receptivity and an energy to explore the region more deeply and with renewed motivation, as regional opportunities have come knocking on our door again. “

Intraregional investment in South Asia is relatively low, at just $ 3 billion in 2017. Inward FDI and outward FDI represented only 0.6% and 2.7% of world totals, respectively.

Nonetheless, there are some encouraging signs. For example, companies with a small volume of trade can invest in liaison offices, and investments also take place in service operations and production.

Investments from smaller countries are growing, although investments from India, by far the region’s largest economy, still predominate. The report documents the step-by-step approach of companies to invest outside their home markets, for example by learning from their previous experience as exporters, or starting with a very modest engagement.

“Pakistan has not received the amount of foreign direct investment it deserves,” said Fareena Mazhar, secretary of the Pakistan Board of Investment. PROVIDED

KNOWLEDGE CONNECTIVITY

The report highlights two under-researched factors that may be critical in unlocking the potential of regional trade and value chains in South Asia: knowledge connectivity and intraregional investment.

A survey of 1,274 companies in the eight South Asian countries assessed “knowledge connectivity,” or what business people in one country knew from another country. The average score among the country pairs was only 1.9 out of 4, ranging between “not at all” and “not very well” informed.

Information and network frictions, as well as bilateral mistrust, reflect the high costs of cross-border research, matching and contracting, as well as market failures in providing channels to mitigate these frictions.

Knowledge connectivity can have different roots. Social and ethnic networks, for example, tend to be linked to an increase in cross-border investment. For service FDI, these networks are even more important than factors such as productivity improvements.

In general, investments increase gradually as companies learn from exporting and from affiliated companies in a conglomerate.

Despite the handicaps, some pioneers of regional investment in South Asia have succeeded in creating profitable businesses in different sectors.

When it comes to improving basic infrastructure to support investment, regional electricity trade focused on renewable energy sources such as wind could strengthen the energy mix of participating countries, Hector said. Gomez Ang, IFC South Asia Regional Director. An efficient electricity 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 companies may play a role in advanced digital connectivity, for example electric vehicles.

“I think there are huge opportunities in the region if people are just able to have an open mindset about what they want to explore,” said Ahsan Khan Chowdhury, CEO of PRAN- RFL from Bangladesh. PROVIDED

However, further efforts are needed in some countries to create a business environment conducive to the growth of intraregional investment in the post-Covid era. South-South cooperation can play a critical supporting role in paving the way for companies wishing to enter other markets in 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. This will help open up more markets, especially on the tech side. “

Pakistan is a country that has invested a lot in the region. Its first intra-regional investment dates back to 1951 with a branch of Habib Bank, the country’s largest lender, in Sri Lanka. But inward FDI into Pakistan fell short of expectations.

“Pakistan has not received 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 of investors. in the past.

These issues have been resolved, she said, adding that a liberal investment regime allows full repatriation of profits and investments across all sectors. The country hopes to generate more interest, especially in special economic zones where a 10-year income tax exemption is offered, as well as tax-free imports of machinery.

High incentives and low interest loan programs are also offered for the export sector. New legislation is pending to improve the ease of doing business in Pakistan.

Ms. Mazhar also said the new policies on manufacturing electric vehicles and cellphones have been well received by investors. In the first 10 months of this year, cellphone production by local factories nearly doubled from the previous year to 18.9 million, against imports of 45 million. Samsung of South Korea recently opened a new joint venture factory in Pakistan with a production target of 3 million units per year once it reaches full capacity.

In addition to Samsung, another big name entering the Pakistani market is Japanese clothing giant Uniqlo. “Anyone who comes to Pakistan never leaves Pakistan,” Ms. Mazhar said.

During the Covid pandemic in Pakistan, more than 15 million beneficiaries received one-time emergency cash grants, and the extra money flowing into the economy has helped SMEs recover.

“We have high hopes for private equity and venture capital. There will be a lot of intra-Asian opportunities, ”said Hector Gomez Ang, regional director for South Asia at the International Finance Corporation. PROVIDED

COMMERCIAL OPTIMIST

Despite restrictive FDI regimes, low levels of trust between countries, limited financial resources, and gaps in knowledge and networks, some regional investment pioneers have succeeded in building profitable businesses.

Among the success stories is the PRAN-RFL Group, the largest food and beverage brand in Bangladesh.

Group CEO Ahsan Khan Chowdhury sees the pandemic as a godsend. This has given his business a tremendous boost in terms of consumption of its wide range of products.

The conglomerate, established in 1981, pioneered agribusiness in Bangladesh by offering farmers guaranteed prices (PRAN stands for Program for Rural Advancement Nationally). In 2015, the company opened a 2 billion rupee ($ 26 million) production plant in Tripura state in northeast India, seven years after the Delhi government lifted the ban on direct investment from Bangladesh. PRAN also started exporting by river to India from Bangladesh in March 2021.

“I don’t see India as a country, but as a continent. For a small business operating in Bangladesh, India is a world we are here to explore, ”Chowdhury said during the webinar.

He said the Nepalese government had also given the green light to imports of PRAN products, adding that a national factory would be operational soon. His company also continues to export many consumer products to Afghanistan despite the continuing unrest there. He hopes to increase business investment in Pakistan as soon as the tariff structures are resolved.

“I think there is a huge 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 is a wonderful world that needs to be explored. Of course, we are able to connect more and more at the regional level.


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