Why South Asia’s per Capita GDP Trails East Asia’s

My recently published note on the East Asian Miracle made me wonder why South Asian “turtles”­—economies that have shown relatively slow growth—show no signs of overhauling East Asian “hares.” Starting from roughly comparable levels of per capita GDP in the mid- 1960s, South Asian countries have lagged far behind the developing economies of East and Southeast Asia (Figure 1). Moreover, the gap has widened from the turn of the century. South Asia failed to climb onto the export-led bandwagon once the East Asians had demonstrated its merits from the 1960s onwards and tested the policy instruments that could help deliver desired results. The region is paying the price for allowing the opportunities to let slip.

Figure 1. Developing countries in East Asia (red) and in South Asia (blue): Constant per capita GDP 2010 dollars

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What’s behind the slow growth of South Asian economies?

There is no dearth of commentary on why the South Asian countries languish in the lower reaches of the middle-income classification. One compelling explanation, which closely aligns with East Asian success stories, is the composition of South Asian merchandize exports compared to those of the upper-middle-income East and Southeast Asian countries.

In the mid-1960s, import substituting industrialization was the norm throughout Asia and elsewhere in the developing world. However, starting with the Tiger economies, other East Asians realized the advantages of export-oriented industrialization (EOI) and exploited the opening created by global trade liberalization. Using low-tech manufactures (garment, footwear, toys, food products, wigs, etc.) as the point of entry, they quickly shifted into medium- and high-tech industries that delivered superior returns. The transition to EOI was supported by foreign direct investment, integration into global value chains, rapid technology assimilation, construction of transport and energy infrastructure, and education and training policies. The Tigers were the first to diversify into electronics, electrical machinery, transport, ferrous metals, petrochemical and engineering industries, with a few of the Southeast Asians close behind. Export successes yielded handsome dividends.

South Asia missed the boat. Industries were sheltered for too long; firms were not incentivized to seek and seize export opportunities and domestic firms themselves showed little initiative to develop new products and penetrate the fast-growing segments of the global market. South Asian countries have continued to export low-value and low-tech manufactures and resource-based products. And by and large, South Asian firms have been content to earn their profits in protected domestic markets. By taking the low road, South Asia sacrificed the growth potential inherent in EOI.

A future for export-led industrialization in South Asia?

However, talk of EOI is again making the rounds in South Asia as governments, some confronting popular unrest, struggle to raise or sustain moderate growth rates. The answers to four questions can help illuminate the likelihood of a South Asian export-led mini miracle.

1. Have South Asian countries demonstrated the capacity to diversify from light manufactures and resource-based products and move up the manufacturing value chain since the turn of the century?
2. Is there an emerging base of technical knowledge and skills sufficient to enable the production of higher tech and higher value products?
3. Is the political economy of these countries and elite commitment conducive to political stability and long-term policies enabling investment both domestic and foreign, as well as steady growth?
4. Do these countries have large national corporations that could undertake the needed structural transformation of the tradable sector and spearhead export-led growth? Have they attracted multinational corporations that could take the lead, as in Singapore, Malaysia, and Vietnam?

With the help of the copious literature and data on the topic, it is arguably safe to answer these questions as follows:

First, South Asian countries have taken baby steps towards diversification over the past two decades, but the bulk of their commodity exports are low-value, light manufactures—mainly garments and textiles—and resource-based products such as edible oils, food grains, tea, spices, leather goods, refined petroleum, metal products, cut diamonds, jewelry, crustaceans and others. (The Observatory of Economic Complexity provides detailed information on export volume and composition.)

Second, there is an emerging base of skills especially in India, but these have not sufficed to bring about the needed structural transformation of manufacturing industry. The steady hemorrhage of skills from each of these countries continuously undermines the capacity to substantially alter and upgrade the product mix and achieve scale. Apart from Bangladesh, the share of manufacturing—the motor of EOI in East Asia—has either declined or stagnated since 2010 at levels below 20 percent of GDP. Furthermore, the share of goods and services exports in GDP has also declined in Bangladesh, Nepal, and Sri Lanka, and stagnated in Pakistan since 2012. India’s share increased modestly from 19 percent in 2017 to 21.5 percent in 2021.

Third, considering performance over the past decade and recent political occurrences, a long-term developmental vision and elite commitment to policies that would deliver rapid growth is hard to discern in Pakistan, Nepal, Sri Lanka, and Bangladesh. Only India has political stability, the makings of a vision and what appears to be elite commitment to steady growth.

Fourth, India has the large corporations and conglomerates that could, with the right incentives and government pressure, have ignited EOI decades ago. But that did not happen, and it is not apparent from the data on the share of manufacturing, the composition of merchandize exports and the share of exports of goods and services in GDP that an export-led takeoff is likely on the East Asian scale. Such potentially outward-oriented large firms are missing in Pakistan, Sri Lanka, Nepal, and Bangladesh. This is not to say that these countries do not have their share of major firms and conglomerates. It is just that these firms have not attempted to grow by exporting and established a firm foothold and a brand name in the global market like Hyundai, Samsung, Huawei, BYD, TSMC, Foxconn and others from Singapore and Thailand have done. Moreover, none of these countries has attracted the volume foreign direct investment by multinational corporations that Singapore and Malaysia managed, and leveraged that to initiate a growth spiral.

Is EOI still in the cards for these countries? The short answer based on a reading of recent tea leaves is that export-led growth underpinned by industrial policy is a long shot. One should never say never, but regional, geopolitical, and climatic developments have taken a discouraging turn. Even though a new general-purpose technology—artificial intelligence—holds promise, its many downsides and the absence of any evidence to date that it could increase potential growth in developed or developing countries, raises doubts. The balance of the 2020s could, as the Chinese saying goes, be “interesting times” for all.