'Development of the Private Sector in South Asia: Addressing the Challenges for Building ...

7/30/2019 'Development of the Private Sector in South Asia: Addressing the Challenges for Building Competitiveness' - 6th SAES Theme Paper by CPD (Dhaka, Banglad

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Towards a Stronger, Dynamic and Inclusive South Asia

6th SAES THEME PAPER

Development of the Private Sector in South

Asia: Addressing the Challenges for Building

Competitiveness

August 2013

Prepared by Centre for Policy Dialogue (CPD), Bangladesh, for Plenary Session 4 of the 6th South Asia

Economic Summit, 2-4 September 2013


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This paper is one of four theme papers prepared by

leading think tanks in South Asia, commissioned by

the Institute of Policy Studies of Sri Lanka (IPS) for

the 6th

South Asia Economic Summit (SAES). This

ears SAES centres around 4 key themes, what is

being termed The Big Four - Harnessing HumanCapital Potential; Managing Water Resources, Food

Security and Climate Change; Addressing Intra-

Country Growth Disparities; Building

Competitiveness of the Private Sector. These were

selected based on their relevance to collective

growth concerns of South Asian countries, in

keeping with the Summits main theme of Towards

a Stronger, Dynamic, and Inclusive South Asia. An

Expert Panel Discussion will debate each of these

themes in four dedicated plenary sessions.


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Development of the Private Sector in South Asia: Addressing the Challenges

for Building Competitiveness12

1. Introduction

The private sector is considered to be a key player from the perspective of economic growth

and development in South Asia. This is demonstrated by the growing role of the private sector

in the economies of South Asia in recent years in view of policies of deregulation and

liberalization pursued by all the countries of the region. The rising degree of openness of South

Asian economies, with greater role of export and import in the economy, higher share of

private sector investment in total investment and higher pace of employment in the private

sector. However, in spite of the commendable growth, private sector in South Asia is beset

with formidable problems and is confronted with major challenges. Informal characteristics is

still overriding features of the private sector in South Asia with only a fraction operating as

Schumpeterian Entrepreneurs operating on the principle of risk taking, managerial ability,

flexibility and market adjustments and innovation.

Despite commendable success in a number of areas, South Asia continues to remain one of the

least competitive regions in the world. In major global rankings on competitiveness, the

majority of the South Asian countries find themselves in the lower ranks in the ranking

hierarchy. For example, India which is ranked highest within the region, occupied 59 th position

(out of 144 countries in 2012), followed by Sri Lanka (68), Bangladesh (118), Pakistan (124) and

Nepal (125). Since private sector has the commanding heights in all these countries, these

rankings in terms of global competitiveness essentially in a way also reflects the level of

competitiveness of the private sector in South Asia in a global setting. Indeed, development of

the private sector in the South East Asian region, with its rich and varied experience, could

1 Disclaimer: This paper was prepared by Dr Khondaker Golam Moazzem (Additional Research Director) and

Professor Mustafizur Rahman (Executive Director) of the Centre for Policy Dialogue, Bangladesh for the 6th

South Asia Economic Summit. The research contained herein, including data, analysis, and/or policy

recommendations are those of the author/s and the IPS bears no responsibility for them. Any

queries/clarifications/errors/omissions can be directed to [email protected]

Authors would like to register their deep appreciation to Kishore Kumer Basak, Research Associate, CPD, Farzana Sehrin, Research Associate,

CPD, and Mashfique Ibne Akbar, Research Associate, CPD for their research support in this study.


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throw important insights from the perception of drawing useful lessons for the private sector in

South Asia and present report has tried to do through a comparative study of same key

variables.

It has to be conceded, though, that private sector in South Asia embodies a diverse range of

enterprises, varying from informal to formal entities, from SMEs to large-scale units, from

predominantly export-market oriented to the domestic market ones and from those that are

highly competitive to the ones which are characterised by low productivity and weak

competitive strength. The present study has mainly concentrated on the particular segment of

the private sector which needs to go higher up in the competitiveness scale by taking

advantage of the emerging regional and global opportunities and thus have attempted to

identify factors which could drive this objective.

The objective of this paper is to provide a state of affairs picture and structure of the private

sector in South Asia, its major defining features, identify factors responsible for low level of

competitiveness and put forward suggestions about possible ways to build competitive

strengths particularly through learning from the rich experience of countries of the South-East

Asian region. The paper includes nine sections. Section Two presents a brief discussion on the

concept of private sector, entrepreneurship and national and enterprise level competitiveness.

Section Three briefly discusses the methodology of the study. Section Four presents an

overview of the structure of the private sector in South Asian countries. Section Five analyses

role of private investment in GDP growth and employment generation. Section Six analyses

factors responsible for poor performance of the private sector in South Asia. Section Seven

presents a discussion on competitiveness in the context of the private sector in Southeast Asia

with a view to learning appropriate lessons from the perspective of South Asian private sector.

Section Eightpresents the current state of development of value chains in South Asia and thescope and opportunity for development of regional supply chains. Finally Section Nine presents

a set of recommendations for building enterprise level competitiveness in the region.

2. The Concept of Competitiveness of the Private Sector


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Private sector: By and large, private enterprises are observed mainly in manufacturing and

services sector in South Asia; economic activities in the agricultural sector is still of

subsistence nature and most such activities could not be termed as entrepreneurial ones

(Ritson, 2008). For the purpose of the present study, enterprise, entrepreneurship and

entrepreneurial activities carried out in the manufacturing and service related sector has been

taken into account as activities under the private sector.3 However, as was pointed out, the

private sector in South Asia covers a whole range of enterprises, ranging from those that

compete globally and those that are of subsistence nature. Private sector enterprises include

both domestic and foreign units located in domestic tariff area (DTA) and export processing

zones (EPZs) and other specialized areas. Consequently, drawing unique set of indicators of

analysis and policy conclusions, thus is, to that extent, difficult.

Domestic, Regional and Global Value Chains: Participation of enterprises in developing

countries in the global value chain is rather limited in view of the limited number of

competitive products in their production basket. Participation in the domestic value chains is

high although their competitiveness often depends on domestic incentives and support (Butt,

2005). In South Asia many enterprises are found to operate in the middle-segment of the value

chain, based on imports of intermediates and supplying the finished product to the forward-

linkage entities.

Small, Medium and Large Enterprises: There is no uniform definition of categories of

enterprises that is followed across countries. Value of physical assets including land and

building, number of employees and machineries and management related issues etc. are often

considered as indicators for categorizing enterprises. There is weak linkage between different

categories of enterprises in South Asia. Markets are often segmented in nature where large

enterprises participate in more organized segment and small enterprises participate in lessorganized and informal segment of the market. Ensuring participation of all categories of

enterprises in all segments of the market is a challenging task (Lall, 2000).

3Despite the fact that a part of activity in the agriculture sector are operated through commercial enterprises but has not been taken into

account in this paper.


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Entrepreneurship: Entrepreneurship in developing countries has developed with the

development of the private sector. Schumpeterian entrepreneurs are those which feature the

role of risk taking (Kihlstrom and Laffont, 1979), managerial ability (Lucas, 1978), having

wealth (Evans and Jovanovic, 1989), and preferences for the control, flexibility and other job

attributes that come with being ones own boss (Hamilton, 2000) as the primary motivations

for entrepreneurship. A large segment of small enterprises do not evince features of

entrepreneurship in the Schumpeterian sense. Most of these enterprises manufacture similar

products and offer services which are to some extent available in the market and therefore

such enterprises often tend to cut the normal profit margin in the market (Clough,2011)

National Competitiveness: National competitiveness is demonstrated in the form of

diversification of the economy through enhanced production and export of diversified

products beyond traditional markets. This is achieved through upgradation of skill,

productivity enhancement and embedded technology and economies of scale (UNCTAD,

2002). National competitiveness depends on macroeconomic policies, adjustment of natural

endowments and availability of skilled human resources and most importantly, their efficient

organisation with a view to attaining the targeted level of competitiveness (Porter, 2000). The

Global Competitiveness Report published by the World Economic Forum has ranked world

economies according to 12 indicators of which 4 indicators are relate to basic requirements, 4

indicators to efficiency enhancers and 2 indicators relate to innovation and sophistication.4

The weights given to these indicators are different depending on the stage of economic

development of individual countries. Since major economies of South Asia except Sri Lanka

are at factor driven stage (economies having per-capita GDP less than US$2000), major

weights are on indicators related to basic requirements. These include institutions,

infrastructure, macroeconomic environment and health and primary education. Efficiency

related indicators get relatively lower weight; and innovation and sophistication also receive

lower weight. In contrast, Southeast Asian economies are mostly at efficiency-driven and even

in innovation-driven stages, where efficiency and innovation related indicators are given more

4Basic requirements include institutions, infrastructure, macroeconomic environment and health and primary education; efficiency

enhancers include higher education and training, goods market efficiency, labour market efficiency, financial market development,

technological readiness and market size; and innovation and sophistication indicators include business sophistication and innovation.


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prominence. National competitiveness is also measured by a number of other indicators such

as ease of doing business index published by the World Bank and FDI potentiality index

published by the UNCTAD in the World investment Report. Indeed, these indicators also

transmit similar messages with regard to overall state of competitiveness both in case of South

Asian and South-East Asian economies.

Enterprise Level Competitiveness: Enterprise level competitiveness is interpreted through an

ability of the entrepreneurs to offer goods and services which are competitive in price and

quality, ability to respond to changes in demand quickly through offering diversified products

and capacity to follow innovative marketing strategies (Altenburg et al. 1998). In other words,

building competitiveness along those lines could be interpreted as an ability to increase value

added through enterprise level activities. According to Porter (2000) an iterative way to

increase value added at the enterprise level is to look beyond comparative advantage which

involves lowering of price by focusing on competitive advantage which deals with quality of

products, better marketing and delivery system and flexibility in market changes. In less

competitive economies, enterprises often operate targeting for low cost advantages without

having focus on development of quality and diversity of products, lack of attention to

marketing and delivery issues. In broad sense, most of these enterprises compete not for

earning normal profit, rather the end-result is to cut the profit margin. Thus, often enterprises

operating in these economies fail to pay attention to the Five Forces that inform a typical

model of competitiveness that features in Porters model.

Porter (2000) delineates the Five Forces model for building competitiveness at enterprise

level (Figure 1). Given the situation of prevailing segmented markets in developing countries,

Porters model could be differentiated into two segments- advanced and traditional. An

elaborate structure of enterprise level competitiveness reveals different aspects related topotential competitors, suppliers, buyers, substitutes and industry competitors. These are

particularly important with the presence of large number of small and medium enterprises who

usually operate informally without having any presence of well-structured value chains in the

market. Markets in developing countries operate with multiple actors in each segment. Firms


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entry, operation and exit from the market depend on its activities in the market under complex

situation. Only a small segment of firms, mainly those that compete in the global market,

perhaps operate on building competitiveness as envisioned in Porters five forces model which

considers potential entrants, buyers, suppliers, product substitutes and rivalry of enterprises

(Figure 1).

Figure 1: Elaboration of Five Forces in the Domestic Market in Developing Countries

Source: Based on Porter, 2000

Policies and Institutions for Building Competitiveness: Enterprise level competitiveness

further depends on development of meso level issues which include national, regional and

global policies and domestic institutions. Lall (2001) has put emphasis on development of

supportive policies and institutions as a core force for building competitiveness. This is

particularly relevant for enterprises, particularly SMEs, which has to confront various types of

market failures including in such areas as financing, access to information, technologies and

marketing etc. In a systemic competitiveness enterprise level competitiveness lies in the

ability to design appropriate instruments and mechanism to improve macro, meso and micro

level competitiveness. Countries lagging behind competitiveness often fail to identify

appropriate instruments and are not able to undertake continuing improvements in areas that

define competitiveness.

Suppliers

Potential entrants

Bu ers

Domestic Industry

competitors (1)

Substitutes

Local Investment FDI

Local

Foreign

Local

Foreign

Local Imported

Small Medium Large

Small Medium Large

Domestic Industry

competitors (2)

Small Medium

Local

Local Investment

Small Medium


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In the context of ever changing global economic environment particularly through

globalization, accelerated technological change and growing demand for better quality

products, enterprises in less competitive economies particularly the SMEs often have to

confront the risks of exit. Limitations of small size, market distortion, weak institutional

support and ineffective policy interventions act against the SMEs. Thus ensuring conducive

business environment is not sufficient for building competitiveness of SMEs unless proactive

national, regional and global policies are in action there (Lall, 2000; OECD, 2004). Here

proactive policy support to SMEs in building their competitiveness becomes critically

important.

3. Methodology of the Study

The paper focuses on both national and enterprise level competitiveness of private sector in

South Asia with a view to drawing deeper insights into the underlying factors. The following

methodology has been followed towards this.

Methods for Analysis of National Competitiveness: Analysis of national competitiveness has

been carried out by using data from the Global Competitiveness Report (GCR) published by the

World Economic Forum. Based on the perception of leading entrepreneurs as regards various

aspects of the country based on twelve pillars which was noted earlier, country scores were

calculated to arrive at country-rankings in the global context. Except Afghanistan and

Maldives, all other South countries are included in the ranking of the GCR. For the purpose of

the present analysis, country level data for various macroeconomic indicators such as sectoral

GDP, gross fixed capital formation (public and private), FDI, export and import and

employment have been used from the database of the World Development Indicators.

Discussion on national policies has drawn on published materials, documents and academic

articles. Similarly, analysis of regional and global initiatives and arrangements are based onpublished reports and academic articles.

Methods for Analysis of Enterprise Level Competitiveness: The paper deals with

competitiveness of enterprises which is a multi-dimensional concept. It is related not only with

price and quality of product/services and timely delivery but also concerns ability to offer


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diversified products and capacity to follow innovative marketing strategies etc. Productivity

measure at enterprise level is one of the major indicators of competitiveness of the private

sector. However, diversity in product composition, innovative marketing strategies and risk

taking attitudes etc. are also important indicators for analysis purposes. Analysis of the private

sector has been carried out by taking recourse to value chains approach through identification

of competitiveness at raw materials, intermediate, manufacturing and marketing stages of the

value chain. Most of these concepts of competitiveness in the manufacturing framework are

equally applicable for enterprises involved in the services sector supply chains although nature

and extent of importance of these indicators are different (Drzymalski, 2012).

A major area of interest of analysis will be identification of the weaknesses in processes,

management and operation at enterprise level, in the process of production of goods and

services and development of entrepreneurship, analysis is needed as regards national and

sectoral policies pursued, regional and global agreements on trade and investment and

business enabling environment and socio-political environment. Besides, enterprise level

issues such as operation, management, marketing, technology and innovativeness, and

entrepreneurial issue such as risk taking attitude also play an important role. For the purpose

of the present analysis some of the critically important factors will be considered in an indepth

manner.

The study has been carried out on the basis of available secondary information and data on

private sector and enterprise development in South Asian countries. There is a lack of regional

level data on enterprises, particularly on SMEs in terms of number of enterprises, production

cost, profitability, productivity and level of efficiency. For this study World Banks enterprise

survey data has served as a key resource (Table 1). This dataset is based on firm-level survey

using representative sample from the private sector. A total of 8436 enterprises were coveredunder this survey; except Maldives sample enterprises were taken from all other South Asian

countries. Distribution of sample enterprises in terms of size, sectoral distribution, ownership

pattern and export-orientation etc. by and large correspond to relevant national population for

those indicators. The survey covers a broad range of business environment factors including


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access to finance, corruption, infrastructure, crime, competition, and performance measures.

The manufacturing and services sectors are the primary sectors of interest in the survey. The

firms include companies with five or more employees. Firms have been categorized as small,

medium and large in terms of their size of employment. 5 The survey also covers perception of

enterprises with regard to major obstacles to operating the business. Since the country-

specific surveys have been carried out at different points in time (2007-2011), inter-country

comparability will likely have its limitation. However, many issues are generic and time

dimensions should not be of overriding concern.

Table 1: Sample Structure of the Survey

Country

Yea

r

Tot

al

Size Sector Ownership

Market

exposure

Micro/S

mall

(


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Nepal

200

9 368 52.4 38.9 8.7 37.2

29.

6 32.9

0.

3 95.9 4.1 6.3

93.

8

Pakista

n

200

7 935 60.7 23.5 15.7

83.

9 6.3 9.8

0.

0 97.2 2.4 11.1

79.

5Sri

Lanka

201

1 610 52.0 29.2 18.9 59.3

19.

8 20.8

0.

0 95.1 4.9 7.4

92.

6

South

Asia

843

6 58.5 23.9 15.9

59.

5

28.

6 10.3

1.

3 97.5 2.1 11.4

85.

4

Source: World Bank

4. Private Sector in South Asia: Structure, Composition and Market Focus

4.1 Trends in Investment in manufacturing and Services Sectors

Private sector investment has now emerged as the main driver of domestic investment in all

the South Asian countries (Figure 2). It reached its peak in 2008 when South Asias domestic

investment reached over 30 per cent of GDP which declined afterwards mainly due to global

economic slowdown after the global financial crisis. Most South Asian countries have

experienced rise in investment-GDP ratio, although this has fluctuated over the years; Sri

Lanka and Pakistan have experienced a decline in this ratio (Figure 3). Domestic private

investment constitutes the major share of investment with only a small share claimed by

foreign direct investment (FDI) FDIs share is about 2-3 per cent of total investment. Unlike in

Southeast Asia, FDI is not a key player in South Asias investment scenario.

Figure 2: South Asia: Trends in Public and Private Investments

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Gross fixed capital formation (% of GDP)

Gross fixed capital formation, private sector (% of GDP)

Gross fixed capital formation, public sector (% of GDP)


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Source: WDI Database, 2012 (available at: http://data.worldbank.org/data-catalog/world-development-indicators)

Figure 3: Investment as Percentage of GDP in South Asia


Service sector is the major contributor in the GDP and its share has been increasing in all the

South Asian economies (Table 2). Some of the economies are overwhelmingly dependent on

services (i.e. Maldives); other economies are becoming increasingly dependent more on

services (Sri Lanka, India and Bangladesh). A growing debate relates to whether a service-

sector led economic development is possible in South Asia (World Bank, 2009)? Major service-

related activities in the region include both traditional services such as wholesale and retail

trade, restaurants and hotels, transport-storage, construction and community, social and

personal services and modern services that include communication, banking insurance and

business related services. The former group of services could be termed as stagnant

impersonal services where application of modern technologies (ICT) has tended to be lower

whilst the second group is often called progressive impersonal services where modern

technologies are being extensively used (World Bank, 2009). The rise of the service sector has

come in the backdrop of deregulation and policy reforms particularly in the

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.01990 2000 2011


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telecommunications, rising income and domestic demand for various types of distribution

related services (Raihan, 2013).

As in developed and some of the other developing regions, manufacturing and services related

activities are becoming increasingly integrated and there is good indication of convergence of

both these activities particularly in well-functioning supply chains/value chains. However,

South Asias services sectors are yet to be functionally integrated with manufacturing sector to

support advanced manufacturing supply chains.

Table 2: Contribution of Service Sector in South Asias GDP

Country 1981-90 1991-00 2001-10

Afghanistan 18.76 27.95 46.04

Bangladesh 56.27 58.86 60.54

Bhutan 30.71 40.52 53.24

India 46.48 51.79 60.99

Maldives 82.53 87.2 86.48

Nepal 48.09 52.64 55.38

Pakistan 54.03 54.14 54.84

Sri Lanka 60.95 62.03 64.54Source: Raihan (2013)

Although economic liberalisation has opened up opportunities for the development of private

sector enterprises in South Asia, the experience has, however, been mixed. Whilst there has

been notable compositional change in the GDP with rise in share of the manufacturing sector,

with the private sectors role on the ascendency, structural transformation in the economy has

been of rather limited nature. Even in case of India, the leading economy in the region,

manufacturing sector has experienced slower growth of the value added during the post-

reform phase and the sector is still dominated by low-tech industries (Mehta, 2011). Some

spatial differentiation is, however, visible with regional diversity in growth of enterprises

underwritten by higher access to foreign technology and better infrastructural support (Siggel

and Agarwal, 2009). A significant share of micro, small and medium enterprises is dominated


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by marginalized groups and these are of subsistence nature (Deshpande and Sharma, 2013).

Concurrently, share of corporate sector in industrys gross output, value added and number of

employment has been on the rise in India (Rajkumar, 2011). In Bangladesh, trade liberalization

had mixed results as far as the manufacturing sector was concerned. Whilst share of

manufacturing sector in the GDP, as a group, has gone up, only a few sectors have been able to

demonstrate their competitive strength in the global market barring the RMG. However, some

domestic market oriented industries thanks to the sizeable and growing domestic market have

been able to strengthen their foothold in the domestic market. These include processed food,

light engineering, electronics, plastics etc (Moazzem et al., 2012).

In general, inspite of the growing participation of the private sector, and some notable

exceptions, a modern manufacturing sector is yet to emerge in South Asia. Most cater to the

lower end of the demand curve, lack upgradation and integration with services sector.

4.2 Composition of Private Sector Enterprises in South Asia

There is lack of comparable detailed data on enterprises working in manufacturing and service

sectors in South Asian countries; however, sectoral contribution in GDP and information on

value addition and employment are found in most national statistics (Table 3). According to

Ministry of Statistics and Programme Implementation of India, a total of 41.68 million

enterprises were in operation in India out of which 39.8 million were small (95.1 per cent), 1.4

million were medium and 0.63 million are large enterprises (Table 4). The data on micro, small

and medium enterprises (MSME) reveals an annual 4.6 per cent rise in number of enterprises

between 2006 and 2009. In India enterprises composition is still heavily tilted towards micro,

small and medium enterprises. Number of enterprises in Pakistan was about 7.7 million in 2006

which was 4.6 million in 2001 indicating 14 per cent rise during that period (Table 5). The

Census of Manufacturing Enterprises in Nepal, mentioning about 3450 enterprises in 2007which was 3200 in 2001 indicating only an insignificant change (Table 6). Majority of these

enterprises were small and medium (10-99 workers) (88.7 per cent). Between 2001 and 2006,

the highest rise in enterprises was observed for small enterprises having employment of 10-19

workers (2.8 per cent per cent); in contrast, the number of large enterprises (having


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employment of 100 and above) has come down (by -4.6 per cent in case of enterprises having

worker size of 100-199 and by -1.4 per cent in case of enterprises having worker size of 200+).

Number of enterprises in Maldives was about 32000 where share of medium enterprises was

higher (56 per cent) followed by large ones (19.3 per cent) and small enterprises (24.5 per cent).

Most of these were service-oriented enterprises since 80 per cent of the GDP was generated

through service-related activities. Bhutan, on the other hand, had about 22780 enterprises of

which the majorities were micro enterprises (86.8 per cent) followed by small (11.6 per cent)

enterprises. There were only few medium and large enterprises in Bhutan. In Bangladesh, the

total number of enterprises in 1986 was found to be 2.6 million of which 2.5 million were

micro-enterprises (98 per cent); number of small and medium enterprises were 49,000 (1.9 per

cent) and large enterprises were 2300 (0.08 per cent). In 2002, the structure and composition ofenterprises was almost the same - out of 3.5 million enterprises, 97 per cent were micro

enterprises, 2.2 per cent were SMEs and 0.16 were large enterprises. Thus, the nature and

growth of MSMEs over the last two decades indicates a horizontal expansion of enterprises in

terms of number of establishments without major change in the pyramid-like structure.

As is the case, South Asian private sector is overwhelmingly dominated by micro, small and

medium enterprises and the number of these enterprises varied among the countries mainlydepending on the size of the economies, and the level of development. Since service sector is

the dominant source of GDP in all these economies, a differentiation of those enterprises from

manufacturing sector could provide a better understanding on the dynamics and changes in

the sectoral composition of enterprises.

Table 3: Distribution of Manufacturing Enterprises

CountryReference

year

Large Medium Small Micro/Others Total

Number

Bangladesh 2005-06 5220 14317 15172 640939* 34709

Bhutan 2011 133 220 2649 19774 22776


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India 2007-08 631000 1431000 39765000 41827000

Maldives 2010 6239 18050 7912 32201

Share

Bangladesh 2005-06 15.0 41.2 43.7 100.0Bhutan 2011 0.6 1.0 11.6 86.8 100.0

India 2007-08 1.5 3.4 95.1 100.0

Maldives 2010 19.4 56.1 24.6 100.0

Note:* Data of cottage industries for 2012

Source: The Ministry of Statistics and Programme Implementation (MOSPI), India; Bangladesh

Bureau of Statistics (BBS), Bangladesh; Central Bureau of Statistics (CBS), Nepal; National

Statistics Bureau (NSB), Bhutan; and Department of National Planning (DNP), Maldives

Table 4: Micro, Small, Medium Enterprises (MSMEs) in India

Year Number

(in million)

Employment

(in million)

Production

(in crore)

2006-07 26.10 59.46 709398

2007-08 27.28 62.63 790759

2008-09 28.52 65.94 880805

Yearly % change between

2005-06 and 2008-09

4.64 5.45 12.08

Source: Annual Report 2009-10 of Ministry of Micro, Small and MediumEnterprises, Government of India.

Table 5: Manufacturing Establishments in Pakistan

Issues 2000-01 2005-06 Yearly


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%

change

Establishments

(in thousands ?)

4528 7701 14.0%

Value Added

(million rupees)

1145061 2446596 22.7%

Source: Pakistan Bureau of Statistics (available at: www.pbs.gov.pk)

Table 6: Manufacturing Establishments in Nepal

Number

ofworkers

2001 2006-07 Yearly percentage chang

Number ofestablishments

No. ofpersons

employment


No. ofpersons

employment


No. ofperson

employm

10-19 1635 16481 1912 19647 2.8 3.2

20-49 716 19969 755 21793 0.9 1.5

50-99 372 25448 392 25706 0.9 0.2

100-199 317 43379 229 31818 -4.6 -4.4

200+ 173 76666 158 70900 -1.4 -1.3

Total 3213 181943 3446 169864 1.2 -1.1

Source: Central Bureau of Statistics Nepal (available at: http://cbs.gov.np/?p=646)

4.3 Structure of Enterprises

Majority of South Asias private enterprises are owned by proprietors (65 per cent of total

firms) indicating limited presence of corporate enterprises in South Asia (Table2). The

participation of foreign owned enterprises in the business is rather limited (2.7 per cent of total

enterprises) which reduces the scope for local firms to build network for getting access to state

of art technologies and various other intangible benefits from foreign-owned firms (e.g.

operation and management practices). Average year of operation of firms varies from as low

as 7 years in Afghanistan to as high as 23 years in Sri Lanka. Differences in the length of stay

indicate firms entry, extent of operation and exit as well as level of entrepreneurial capacities


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Table 7: Structure of Enterprises

Country

Year

SubgroupLevel

Proportion ofunskilledworkers(out of allproductionworkers)(%)*

Percent offirmsidentifyinganinadequatelyeducatedworkforceas a majorconstraint

Percentof firmsusingtechnologylicensedfromforeigncompanies

Percentof firmshavingtheirownWebsite

Percentof firmsusing e-mail tointeractwithclients/suppliers

Proportion oftotalinputsthatare ofdomesticorigin(%)

Afghan

istan

200

8

Manufacturi

ng 28.9 11.8 10.9 20.2 35.3 38.0

Retail ... 8.6 ... 16.5 33.0 ...

Small (5-19) 23.6 19.6 8.5 19.1 36.1 34.5

Medium

(20-99) 35.2 15.9 10.0 28.3 63.5 42.2

Large

(100+) 28.7 11.9 30.0 50.0 73.8 39.4

Bangla

desh

200

7

Textiles ... 25.7 1.0 8.2 46.7 75.7

Retail ... 6.2 ... 5.9 22.5 ...

Small (5-19) ... 22.6 1.3 0.2 5.9 91.4

Medium

(20-99) ... 28.1 3.0 9.6 38.4 71.5

Large

(100+) ... 24.8 6.6 43.4 87.7 46.2

Bhutan

200

9

Manufacturi

ng ... 18.0 12.8 16.1 49.3 40.6Services ... 11.2 ... 33.8 60.9 ...

Small (5-19) ... 7.5 9.5 28.1 51.0 43.9

Medium

(20-99) ... 24.2 11.2 31.4 72.6 37.6


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Large

(100+) ... 30.0 31.4 46.7 92.2 32.1

India

200

6

Manufacturi

ng 36.1 14.4 5.3 32.9 60.7 96.2

Services 40.3 17.6 4.5 20.6 34.2 97.9

Small (5-19) 35.2 15.7 3.1 16.6 36.8 97.8

Medium

(20-99) 37.4 14.7 4.7 39.2 74.0 96.9

Large

(100+) 37.2 11.2 11.6 67.5 93.1 89.7

Sri

Lanka

201

1

Retail ... 22.1 ... 26.4 41.2 ...Small (5-19) 12.2 13.3 3.4 9.4 19.1 96.8

Medium

(20-99) 19.2 21.2 18.1 39.1 57.5 87.0

Large

(100+) 22.9 34.7 31.3 73.3 93.2 62.0

Nepal

200

9

Manufacturi

ng 36.0 4.9 0.6 18.6 36.8 55.8Retail ... 2.7 ... 17.6 45.7 ...

Small (5-19) 36.9 6.0 0.0 17.1 40.0 58.2

Medium

(20-99) 29.3 2.4 2.3 57.7 80.7 46.1

Large

(100+) 49.8 25.9 8.4 74.3 99.1 37.1

Pakista

n

200

7

Textiles 20.3 8.6 1.2 21.4 26.6 95.9

Services ... 13.0 ... 10.9 32.6 ...

Small (5-19) 17.9 5.8 1.4 4.4 11.3 97.1

Medium

(20-99) 19.4 12.0 3.3 32.8 53.1 88.7


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Large

(100+) 28.0 18.0 12.9 84.2 98.0 82.2

Source: Enterprise Survey, World Bank, Different Years (available at:http://www.enterprisesurveys.org/)

Technology Use: A large share of private enterprises in South Asia operates with low-skilled

traditional technologies. Compared to global level, South Asian firms are way behind in using

technologies licensed by foreign companies, quality certification by recognized firms and use

of IT in production processes and in developing forward linkages. Because of overwhelmingly

domestic market orientation, service enterprises use relatively less modern technologies

compared to that of manufacturing sector enterprises. On average, only 7 per cent of total

firms in South Asia have international quality certification, lower than the case for small

enterprises in most of the countries; medium enterprises also do not far better. International

certification is somewhat better in case of Indian SMEs. Compared to large enterprises, the

SMEs continue to lag far behind. Similarly, use of technologies licensed from foreign

companies is rather limited particularly for small enterprises. Similarly, these enterprises lag

behind in terms of building network with foreign companies through using IT based

technologies. South Asian enterprises tend to lack dynamism in technology use perhaps also

arising from relative absence of competitive pressure in the local market.

Export: The structure of export of South Asian countries widely varied in terms of volume,

product composition and export destination etc. The volume of export is ranged between as

low as mere US$83.3 million from Maldives in 2011 to as high as US$301.5 billion from India.

While a large part of export of land-locked countries such as Nepal, Bhutan and Afghanistan is

destined to source South Asian market mainly in India, others mainly target to extra-regional

markets. Agricultural and minerals have been exported largely by Bhutan, Maldives,

Afghanistan while manufactured products exported largely by India, Pakistan, Bangladesh, Sri

Lanka and Nepal. On the other hand, export of services, as percentage of GDP, is high for

Maldives (78 per cent in 2001-10), Nepal (37 per cent) and India (31.7 per cent).

Majority of small and medium enterprises in South Asian countries have only limited exposure

to global markets- share of their export is much lower compared to that of large ones (Table 8).


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In general, SMEs are found to be less export competitive (Chowdhury, 2008).6 The share of

direct export in total sales of large enterprises is higher for Bangladesh (53 per cent), Pakistan

(30 per cent), Sri Lanka (25.0 per cent) and India (27.7 per cent) respectively. A large part of

SMEs operated in vicious circle which hardly contribute to their expansion and growth and

make them competitive. Various kinds of inputs such as raw materials, intermediate products

and capital machineries required in the production process are procured both from domestic

and foreign sources. Both domestic and global supply chains are increasingly depend, for at

least a part of their products, from external sources. Because of lack of availability of required

inputs from within the region (except from India for a number of products) backward linkage

supply chains connected to regional sources are found to be rather limited.

Table 8: Market Focus of Export-oriented and Domestic Market-oriented Firms

Country Year

Subgroup

Level

Proportion

of total

sales that

are

domestic

sales (%)

Proportion

of total

sales that

are

exported

directly

(%)

Percent of

firms using

material

inputs

and/or

supplies of

foreign

origin*

Proportion

of total

inputs that

are of

domestic

origin

(%)*

Proportion

of total

inputs that

are of

foreign

origin

(%)*

Afghanistan

2008 Exporter 34.6 61.3 n.a. n.a. n.a.

2008

Non-

exporter 97.1 0.0 77.9 36.4 63.6

Bangladesh

2007 Exporter 4.8 93.7 89.4 49.7 50.3

2007

Non-

exporter 94.5 0.0 36.3 76.0 23.9

Bhutan

2009 Exporter 25.3 73.8 76.8 35.9 64.1

2009 Non- 99.4 0.0 77.2 42.6 57.4

6Between the two categories, medium enterprises have higher share of export in their total production.


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exporter

India

2006 Exporter 29.1 68.8 23.1 92.1 7.9

2006

Non-

exporter 99.0 0.1 9.1 97.2 2.8

Sri Lanka

2011 Exporter 12.9 67.6 59.0 73.5 26.5

2011

Non-

exporter 95.9 0.1 12.5 92.3 7.7

Nepal

2009 Exporter 59.3 36.6 81.4 31.4 68.5

2009

Non-

exporter 99.7 0.0 66.7 57.5 42.5

Pakistan

2007 Exporter 28.9 68.3 55.8 86.8 13.3

2007

Non-

exporter 97.7 0.0 12.7 95.1 4.9

Note: Exporter: Direct exports are 10% or more of salesSource: Enterprise Survey, World Bank, Different Years (available at:http://www.enterprisesurveys.org/)

4.5 Performance at National and Enterprise Level

National Level: Excepting few countries (Bangladesh, Sri Lanka and Bhutan), productivity ofcapital (in terms of capitaloutput ratio) did not show any significant improvement in most of

the South Asian countries (Figure 4). Capital-output ratios have tended to fluctuate in recent

years; the year 2008 appears to be an outlier of sorts perhaps because of the shocks

transmitted by the global financial crisis. Increasing participation of the private sector did not

automatically transform those enterprises and made them productive and efficient.

Figure 4: Capital-Output Ratio in South Asia


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Source: WDI Database, 2012 (available at: http://data.worldbank.org/data-catalog/world-

development-indicators)

Manufacturing and services sectors in South Asian countries had gone through diverge

experience over the last two decades in terms of performance according to various indicators

such as growth in real output, employment and output per worker and level of labour

productivity (Table 9). According to the World Bank (2009) growth in real output and

employment have accelerated in the manufacturing and services sector in 2000-2006

compared to that in 1990-2000; however, growth in service sector in most countries has

slowed down in 2000-2006. Curiously, growth of output per worker have decelerated across

the board in 2000-2006 over the previous decade; some countries have even experienced

negative growth in 2000s such as manufacturing and services sectors in Nepal and

manufacturing sector in Sri Lanka and services sector in Maldives. The sources of growth of

output per worker in manufacturing and services sector of South Asian countries are not the

same - while Indias output growth in manufacturing largely relied on growth of capital and, in

services, on growth in total factor productivity; in case of Pakistan, both manufacturing and

services were more dependent on growth in TFP (World Bank, 2009). Thus, productivity

improvement needs to take into account improvement of human resources through better

education and training (Wiig, Kolstad and Moazzem, 2013). Sources of growth in South Asian

economies are not the same which needs to be kept in mind while taking policies for building

competitiveness in the private sector.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1981

1986

1991

1996

2001

2006

2011


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Labour productivity in industrial and services sectors in South Asia vary widely; however, in

general labour productivity was higher than in the agriculture sector. Labour productivity was

found to be relatively high in Bhutan (US$19366 PPP per worker in 2005) perhaps because of

small number of industries in selected sectors; the figures were for Pakistan (US$10439) and

for Sri Lanka (US$8906); lowest labour productivity was found to be in Nepal (US$1716). This

indicates significant departures in the level of productivity in industrial sector among South

Asian countries. On the other hand, labour productivity in the services sector was found to be

high in Maldives (US$12790) perhaps due to large scale foreign investment particularly in the

high-value tourism sector; matched figures for Sri Lanka (US$11856) and Pakistan (US$11829)

were found to be lower. Bangladesh has the lowest productivity in service sector (US$4679).Productivity differential among countries were found to be 2.5 times higher for the industrial

sector (difference between highest and lowest was: US$17760) compared to the services sector

(US$7170) indicating wide divergence in activities operates in these sectors. Besides,

productivity of service industry was higher in five South Asian countries indicating efficiency of

the services over manufacturing sector (World Bank, 2009). Total factor productivity in India

was the highest among the South Asian countries followed by Sri Lanka, Pakistan and

Bangladesh (World Bank, 2012). However, South Asian countries were well behind thecountries of neighbouring region, Thailand and Malaysia being the examples. Low labour

productivity of manufacturing and services sector in South Asian region has undermined their

competitiveness both in the domestic and international markets.


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Table 9: Growth of Selected Key Performance related Indicators in South Asia

Country/Issues Manufacturing Services

1990-2000 2000-2006 1990-2000 2000-2006

BangladeshReal output

growth

6.9 7.8 4.5 5.8

Employment 2.1 6.2 2.6 4.7

Output per

worker

4.7 1.5 1.8 1.1

Labor

productivity

6208 4679

India

Real output

growth

5.5 8.1 8.4 9.3

Employment 2.2 5.2 3.4 4.4

Output per

worker

3.3 2.7 4.9 4.6

Labor

productivity

7479 8901

Maldives

Real output

growth

9.3 9.4 8.6 6.2

Employment 2.7 8.5 4.8 7.3

Output per

worker

6.4 0.8 3.6 -1.0

Labor

productivity

7533 12790

Nepal

Real output 7.8 2.6 6.5 3.5


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growth

Employment 19.5 17.7 4.6 4.2

Output per

worker

-9.8 -12.8 1.9 -0.7

Labor

productivity

1716 5552

Pakistan

Real output

growth

4.2 7.3 4.5 6.1

Employment 1.2 6.6 3.7 5.3

Output perworker

2.9 0.7 0.8 0.8

Labor

productivity

10439 11829

Sri Lanka

Real output

growth

6.8 3.5 5.8 5.1

Employment 4.3 4.0 4.1 2.4

Output per

worker

2.3 -0.5 1.7 2.6

Labor

productivity

8906 11856*

Source: World Bank (2009)

Enterprise Level: Performance of most of the South Asian enterprises appears to be below the

average compared to those in the neighboring regions. Capacity utilization of large

enterprises in most of the South Asian countries is higher than that of small and medium

enterprises which is indicative of better efficiency (Table 10). Growth of sales in small

enterprises is either low or negative, while it is better for medium enterprises although in some


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countries it is negative. Despite less impressive growth in sales, growth in employment in

SMEs is considerably better. In other words rise in employment may not enhance productivity

and efficiency of firms in all cases which is partly reflected in decline in growth in productivity

in most of these countries.

Table 10: Performance of SMEs of South Asia

Country Year

Subgroup

Level

Capacity

utilization

(%)*

Real

annual

sales

growth

(%)

Annual

employment

growth (%)

Annual

labor

productivity

growth (%)

Afghanistan 2008

Small (5-19) 72.9 -2.5 11.5 -5.5

Medium (20-

99) 82.7 12.1 16.5 -3.6

Large (100+) 87.8 ... ... ...

Bangladesh 2007

Small (5-19) 76.9 -1.7 -0.8 -2.6

Medium (20-

99) 78.0 3.1 6.7 -2.0Large (100+) 83.5 4.4 7.5 -2.1

Bhutan 2009

Small (5-19) ... 17.6 9.9 7.6

Medium (20-

99) ... 16.9 14.3 5.5

Large (100+) ... ... ... ...

India 2006

Small (5-19) 68.3 ... ... ...

Medium (20-

99) 71.9 ... ... ...

Large (100+) 76.7 ... ... ...

Sri Lanka 2011

Small (5-19) 72.8 2.9 2.2 0.8

Medium (20- 80.6 5.0 2.3 3.3


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99)

Large (100+) 82.8 10.4 3.9 6.8

Nepal 2009

Small (5-19) 80.5 0.5 6.8 -4.2

Medium (20-99) 81.1 11.3 13.0 -2.7

Large (100+) 86.0 ... ... ...

Pakistan 2007

Small (5-19) 76.2 -4.4 2.0 -6.4

Medium (20-

99) 73.3 -1.6 3.9 -4.5

Large (100+) 74.3 -11 1.8 -12.2

Source: Enterprise Survey, World Bank, Different Years (available at:http://www.enterprisesurveys.org/

4.6 Entrepreneurship

South Asian entrepreneurs who operate mostly small and medium scale enterprises have yet

to emerge as so called Schumpeterian entrepreneurs. According to Moazzem and Kishore

(2013) self employed firms which are more risk-averse and less innovative appear to earn lower

revenue in Bangladesh compared to those which take risks, mostly the large enterprises.

According to Bhattacharya (2008), Indian small and medium entrepreneurs are struggling to

build their entrepreneurship; however, in case of larger entrepreneurs many features of

developed entrepreneurship are evident. A large share of the enterprises in South Asia

operates on subsistence pressure owing to lack of opportunities in the formal sector and/or

driven by push factor from the farming sector. A considerable number of these firms are

involved in various types of informal services and manufacturing activities producing similar

kinds of goods and services. These lack innovation and marketing. In general, these firms dont

demonstrate an objective and ambition to maximize profit and lack the motivation to take

risks and innovate new products and services.

It may be discerned from the above discussion that, the structural transformation of South

Asian economies in the backdrop of economic liberalization have created opportunities for


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private sector to participate in economic activities; over time their participation has been on

the rise. However, an overwhelming presence of small and medium enterprises that primarily

focus on domestic market and lack dynamism, expansion and upgradation indicate that South

Asian economies have not experienced the structural changes that the developed economies

have undergone. Development of formal corporate sector is still at an early stage in South

Asia, barring some part of the economy. Overall, these enterprises are yet to gain the

characteristics of competitive firm as suggested by Porter (2000). Private sector in South Asia

is still at an early stage of development which is revealed in terms of structure of ownership,

types of firms, level of graduation of firms, skill composition and market segment in which they

operate. Most countries have experienced horizontal expansion of firms; vertical expansion has

been rather limited. The overwhelming share of these firms is in SMEs sector which arepredominantly self-employed in nature and operate mainly on account of subsistence

pressure.

5. Role of the Private Sector in Driving Growth in South Asia

5.1 Employment Generation

Private sector had a direct role in the economy thorough employment generation. With the

rise in labour-intensive manufacturing and service related activities, scope of employment

outside agriculture had started to experience a gradual rise (Table 11). Between late 1990s and

late 2000s, average share of employment in manufacturing and services has increased only

insignificantly in South Asia in manufacturing from 11 per cent to 12 per cent and in services

from 24 per cent to 28 percent. Rise in share of employment both in manufacturing and

services is observed for Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.

However, agriculture and services are the major sources of employment in most of the South

Asian countries indicating lack of dynamics and changes in the employment sector vis--vis

that of production and investment. In Bhutan the scenario of structure of employment is rather

different - Bhutans employment in agriculture for both male and female has increased. Similar

is the case for Pakistan, particularly for female employment in manufacturing and services

sectors. Likewise, share of employment in industry in Pakistan have come down which

corroborates with the slowing down of the public and private investment in Pakistan. Overall,


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slow pace of growth of productivity and efficiency of private investment in manufacturing and

services sector still leaves a relatively large share of employment in low paid agricultural

activities. This is also reflected in slow reduction of unemployment and rise of youth

unemployment over the years.

Table 11: Employment Situation in South Asia

Issues 1994 2000 2005 2010

Employment (% of total employment)

Agriculture 60.6 59.1 53.5 51.1

Industry 15.9 15.6 18.7 22.4

Services 23.5 24.8 27.7 26.5

Employees

Agriculture, female (% of female

employment) 74.3 74.7 69.9 65.3

Agriculture, male (% of male employment) 55.3 52.9 47.1 46.2

Industry, female (% of female employment) 12.5 11.3 14.3 17.7

Industry, male (% of male employment) 17.2 17.3 20.5 24.0

Services, female (% of female employment) 13.2 13.6 15.6 17.0

Services, male (% of male employment) 27.4 29.3 32.0 29.8


5.2 Impact on GDP Growth

The relationship between GDP growth and investment growth for major South Asian countries

was examined with a view to better understand the nature of the relationship (Table 12). Time

series data for the period of 1971-2011 was used for this analysis. Interestingly, no significantgranger causality was found in case of investment growth over GDP growth in most of the

South Asian countries. In contrast, investment growth was granger caused by GDP growth in

Sri Lanka and Nepal. More importantly, lagged value of investment growth had significant


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granger causality with investment growth for Sri Lanka, Nepal and Bangladesh. Overall, role of

investment in GDP growth was found to be rather limited in South Asian countries.

Table 12: Granger Causality Test for South Asian Countries

Country GDP Growth Granger Causes By Investment Growth Granger Causes By

GDP

growt

h L1

GDP

growt

h L2

Investme

nt growth

L1

Investme

nt growth

L2

GDP

growt

h L1

GDP

growt

h L2

Investme

nt growth

L1

Investme

nt growth

L2

Sri Lanka 0.03

(0.866

)

0.02

(0.895

)

0.03

(0.247)

-0.00

(0.907)

1.47

(0.173)

-2.58

(0.023

)

0.00

(0.561)

0.35

(0.037)

India -0.15

(0.442

)

0.05

(0.793

)

0.16

(0.108)

0.09

(0.929)

0.40

(0.203

)

0.56

(0.134

)

-0.17

(0.407)

-0.13

(0.500)

Nepal 0.07

(0.870

)

-0.15

(0.543

)

-0.00

(0.978)

0.09

(0.296)

-2.70

(0.127

)

1.99

(0.067

)

-0.69

(0.053)

-1.09

(0.014)

Pakistan 0.22(0.209

)

0.22(0.228

)

-0.05(0.424)

0.00(.945)

0.83(0.115

)

1.01(0.062

)

0.17(0.341)

-0.13(0.465)

Banglades

h

0.39

(0.046

)

0.26

(0.168

)

-0.01

(0.883)

0.06

(0.463)

-0.05

(.915)

0.04

(.934)

0.46

(0.034)

-0.15

(0.446)

Source: Authors estimation (2013)

6. Policies of South Asian Countries towards Developing Competitive Private Sector

6.1 Major Policies related to the Private Sector

South Asian countries in general have pursued pro-private sector led development strategies

backed by supportive policies and incentives. Most South Asian countries have structured


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policies targeting enhancement of investment, trade and employment generation etc (Table

13). Under these policies a wide array of incentives and supports for specific industries are

offered. For example, Bangladesh offers support for twelve booster sectors under the Export

Policy 2012-157 and 32 thrust sectors8. Various kinds of fiscal, monetary and non-fiscal support

are offered for all categories of industries under those preferential sectors.

India, on the other hand, identifies a number of sectors for preferential support under its

foreign trade policy which include village industry, handlooms, handicrafts, gems and

jewellery, leather and footwear, electronics and IT hardware, and sports goods and toys. Major

fiscal and budgetary support includes duty-free import of raw materials, machinery and

equipments, and intermediate products, development of new towns for specific industries,zero duty EPCG scheme etc. In case of Pakistan, special incentives

Table 13: Policies of South Asian Countries towards Developing the Private Sector

Co

un

try

Industry

related

Investment

related

SME related FDI related Trade

related

Special

zones

related

Bang

lad

es

h

IndustrialPolicy, 2010

PPP Policyand

Guidelines,

2010

Policy Strategiesfor Small &

Medium

Enterprises (SME)

Development in

Bangladesh,2005

FDI Act 1980 Importpolicy

order

2012-15

BEPZAAct; SEZ

Act 2010

Bh

utan

Framework

for privateparticipation

in

Cottage, Small and

medium IndustryPolicy, 2012

FDI Policy, 2010,

FDI Rules &Regulation 2012

7This includes SMEs, handicrafts, tea, jute and leather

8It includes among others, agro-based and agro-processing industry, ship building, renewable energy, ICT and ICT based service, RMG, API, jute

and jute products, leather and leather products, hospital and clinic, light engineering industry, plastic industry, furniture, handicrafts, energy

efficient appliances, frozen fish industry, tea industry, home textiles, ceramics, container service, warehouse and cosmetics and toiletries.


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Co

un

try

Industry

related

Investment

related

SME related FDI related Trade

related

Special

zones

related

Infrastructure 2010

In

dia

Industrial

Policy, 2012

FDI policy, 2012 Foreign

trade

policy

2009-14

M

aldive

s

Law on Foreign

Investmentsin the Republic

of Maldives

Ne

pal

Competition

promotion

act 2007

Trade

Policy

2009

Pa

kista

n

National

IndustrialPolicy, 2011

SMEDA_Ordinanc

e_2002

FDI Strategy,

2013-17

Strategic

TradePolicy

Framewo

rk, 2009-

12

Sri

La

nka

Strategic Plan,

2011-15

FDI Policy 2013

Source: Collected from various websites

are offered for SMEs, textile and clothing, leather, pharmaceuticals, agro-processing and dairy,

light engineering and machinery products. Major incentives include duty waiver on import of


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raw materials and for export diversification, financial support for support services, provision for

recruitment of foreign workers, support for international certification, subsidized credit,

minimization of tax at investment stage, special scheme for export re-financing etc. Sri Lanka

provides support to SMEs, agro-based industries (e.g. seeds, fertilizer), import-substituting

industries with tax holiday, exemption of VAT and customs duties etc. Nepal has undertaken a

broad-based development initiative for a number of sectors which include RMG, carpets and

woolen goods, pashmina and silk products, handicraft goods, tea, processed leather, coffee

and widen craft products. Support measures include development of export processing zones,

long term strategy for enhancing export, branding and labeling of products, initiatives to

receive for duty free market access, support for product development, technological

upgradation, waiver of duties, fees, taxes on raw materials, export credit guarantee schemeetc.

A major thrust of various supports to private sector related to measures to reduce production

cost through various subsidies, providing advantages over imported products, facilitating

employment generation particularly through support to SMEs, fiscal-financial support to

encourage raising of productivity etc. Some support is provided at post-establishment stage

through tax holiday, duty waiver and subsidized credit etc. In contrast, support at pre-establishment phase for private enterprises particularly for SMEs has been rather limited.

These kinds of support include access to market related information on major competitors,

market potentials and buyers and suppliers of the market etc.

6.2 Budgetary Support for the Private Sector

A large part of budgetary support is targeted to domestic market oriented SMEs to ensure

better access to capital, technological readiness, protecting their interest against importedproducts. There are targeted training programmes for SMEs for development of human

resource, managerial ability, marketing and product quality. In case of Bangladesh, the training

support for small and cottage industries provided by BITAC are found to be very elementary

and lack of focus on the market niche in different areas (Moazzem, 2012). Fiscal incentives are


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given in the form of reduction of tariff, para-tariff and other taxes on imported raw materials,

intermediate products and capital machineries with a view to reduce cost of production and

make the product competitive in local and global markets. Some South Asian countries have

also taken recourse to imposing as a means of giving protection to domestic private sector

(Table 14).

Table 14: Weighted Average MFN Tariff Rates, 2012

Product Groups Bangladesh

Sri

Lanka Pakistan Maldives Nepal India

Animal products 20.7 28.4 14.6 21.3 10.6 31.6

Dairy products 24.0 27.6 30.0 10.0 15.5 33.7Fruit, Vegetables, plants 20.1 25.4 18.2 16.5 11.4 30.3

Coffee, tea 21.8 29.4 12.8 16.5 23.3 56.1

Cereals & preparations 14.5 24.9 18.8 14.9 13.8 30.7

Oilseeds, fats & oils 10.6 26.4 8.8 14.1 9.7 18.8

Sugar and confectionary 18.8 17.8 17.2 13.1 14.4 34.4

Beverages & Tobacco 25.0 69.2 52.5 33.2 56 70.8

Cotton 3.5 0.0 7.0 15.0 14.0 12.0Other agricultural

products 11.5 12.6 6.7 20.3 8.1 21.5

Fish & fish products 23.3 14.7 10.5 16.3 10.6 29.6

Minerals & metals 13.6 9.4 12.4 22.2 12.5 7.4

Petroleum 17.3 9.9 10.7 21.5 18.3 8.2

Chemicals 10.9 3.4 9.6 15.8 11.4 7.8

Wood, paper, Etc 16 13.3 15.5 16.8 13.6 9.1

Textiles 19.9 3.6 16.7 19.6 12.8 13.3

Clothing 24.5 14.8 24.8 25 19.9 15.1

Leather, footwear, etc 14.9 19.3 14.9 26.2 11.5 10.1

Non-electrical machinery 5.8 3.2 9.3 21.9 6.9 7.2


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electrical machinery 13.8 7.5 14.8 22.4 10.4 6.9

Transport equipment 12.8 8.8 24.7 44.2 19.6 15.5

Manufactures, n.e.s. 13.5 11.1 13.1 20.1 11.8 8.7

Source: World Tariff Profiles, 2013 (available athttp://www.wto.org/english/res_e/reser_e/tariff_profiles_e.htm)

A recent major budgetary support to private sector was associated with addressing their

special needs during times of emergency arising from internal and external shocks. For

example, private sector large affected by global financial crisis was supported by respective

governments through various measures. South Asian countries put in a variety budgetary,

fiscal and financial support. These were provided to both export-oriented and domestic market

oriented industries. Besides, governments had allocated fund to provide skill development

training to retrenched workers for reemployment. Similarly, countries like Bangladesh took

special measures after the end of the multifibre arrangement in 2005 in order to avoid its

adverse implications for the garment sector of the country.

6.3 Tax Expenditures

South Asian countries allocate a significant amount of resources each year for various fiscal

measures including tax holiday, reduced taxes, depreciated allowances, tax waiver and duty

waiver etc (Table 15). Tax expenditure in Bangladesh is accounted for 2.52 per cent of GDP in

2006; major share of this expenditure is related to indirect taxes (88 per cent of total

expenditure) particularly value added taxes at domestic and import stage (63 per cent and 19

per cent of total tax expenditures in 2006). The overall tax expenditures tend to vary widely

across countries - for example, tax expenditures in India and Pakistan account for 4.5 per cent

and 0.4 per cent of GDP in FY2005 respectively (Itriago, 2011; Mortaza and Begum, 2006).

Moreover, distribution of tax expenditure is also not same- the share of indirect taxes in India

and Pakistan is 55 per cent and 82 per cent of total tax expenditures in FY2005. There are year

on year fluctuations in the tax expenditure depending upon the changes in the coverage of

sectors and enterprises eligible for those support measures. In Bangladesh disbursement of

cash incentive (in nominal term) has increased from Tk.800 crore to Tk.1500 crore between


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FY2007 and FY2009 (Bakht & Ahmed, 2011). Despite the rise of such tax expenditures, SMEs

whom these support need most have enjoyed less benefit of it.

Table 15: Tax Expenditure as Percentage of GDP

Types of Taxes Cost of Exemptions

Pakistan India BangladeshDirect Taxes 0.070 2.012 0.28

Corporate Income tax - 1.638 0.22Personal income tax - 0.331 0.05Co-operative sector

related-

0.043

Indirect Taxes 0.311 2.48 2.24Sales tax 0.120 -

Customs duties 0.190 2.621 0.10Excise duty 0.001 0.862

-Export credit related - - 1.003Total 0.381 4.492

Source: Mortaza and Begum (2006)

6.4 Competition Policy

A number of countries in South Asian have introduced competition policy with a view to ensure

fair competition in the market. Major focus of these policies had been to contain anti-

competitive practices in the form of building monopoly, price-manipulation and cartels to

enable firms to operate in a level-playing field (CUTS, 2003). Attempts have been made to

address distortions in the domestic market by putting in place national competition policy;

however, anti-competitive practices are common in international trade and these needs to be

addressed through multilateral efforts. For example, the Bangladesh Tariff Commission has

examined anti-competitive practices as regards a number of imported products and identified

frequent cases of dumping (BTC, 2009). In view of global financial crisis, instances of such

cases have been on the rise in the global trade.

6.5 Bilateral, Regional and Multilateral Policies

Besides national policies, multilateral and bilateral policies have positive implications for the

development of the private sector. A number of South Asian countries which are LDCs have

enjoyed preferential market access in developed and developing countries for most of their

tradable products. Such preferential market access has positively contributed not only to raise


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export and production but also to generate employment, develop entrepreneurship and attract

inflow of FDI etc. Bilateral preferential market access as is in existence between several

countries of South Asia, has also made positive contribution to the working of the private

sector in South Asia.

6.6 Challenges for Ensuring Private Sector Development through Policy Support

Although theoretically it seems that policies are effective to ensure targeted objectives for

meeting the market failures in case of credit, labour, products and knowledge, in practice it is

always challenging to implement these policies (Rodrik, 2007). In South Asia, majority of

support measures under different policies target formal enterprises only. Thus, most of the

enterprises which operate informally are often left out. In fact, given the difficulty to comply

with requirements, often even the formal SMEs find it difficult to access the benefits provided

under the various support scheme (Moazzem, 2012).Indeed, it is the large enterprises which is

able to actually access the a major share of the benefit. A major criticism of policy support for

enterprise development is their lack of effectiveness. Selection of preferential sectors is often

found to be biased in South Asia because of the pressure of different groups (Moazzem et al.,

2012). Besides, various instruments offered under different policies are found to be of low

effectiveness because of the failure to cater to particular and specific requirements of firms.

Sometimes enterprises receive benefit without any direct impact on its growth and

development because of wastage and leakage of resources. Despite special financial scheme

for SMEs, a large part of these enterprises are out of formal credit mainly arising from informal

nature of their businesses. Given the limited resources available to these economies, failure to

target properly leaves out the SMEs from getting the expected benefit. In fact, a huge tax

expenditure which puts a burden on the exchequer can hardly be justified given limited nature

of resources if these are not appropriately targeted.

Poor institutional linkages often create bottlenecks for SMEs in getting the intended support.

Lack of coordination among the various involved Ministries and governments remain a major

problem. For example, the industrial policy of Bangladesh, which is implemented by the

Ministry of Industry, speaks of various financial support measures to be given to industries. On


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the other hand it is the Ministry of Finance which has to foot the bill. Often, lack of interface

and coordination among these two creates obstacles in timely delivery of the support.

At bilateral levels often countries undertake policies particularly with a view to support

domestic industries against competition of imported products or to support the domestic

consumers. For example, Indias decision to ban export of cotton directly affects the RMG

industry in Bangladesh which is largely dependent on imported cotton. Similarly, Bangladeshs

decision to restrict trade of cotton and yarn through land ports increased the import cost. Non-

tariff barriers are increasingly becoming an issue of concern in bilateral trade in South Asian

countries. Long certification process, limited testing facilities, lack of human resource for fast

trade facilitation at the border point, limited number of border points for trade etc. oftenincrease the transaction cost of export at the regional level.

7. Domestic Bottlenecks Impeding Private Sector Competitiveness

7.1 Weakness in Macro IndicatorsThe bottlenecks that undermine private sector competitiveness include weaknesses relating to

institutions, infrastructure, macroeconomic environment, education, skills, and training, goods

market efficiency, labour market efficiency, financial market development, technological

readiness, market size, business sophistication and innovation. South Asian countries are

below the average level of performance in terms of most of the indicators used in the Global

Competitiveness Report (Table 16). India is well-ahead of other South Asian countries because

of better performance in market size, financial market development, business sophisticationand innovation. Better business sophistication and innovation indicates its strength in the

performance of the corporate sector. Among the other countries, Sri Lankas competitiveness

position was found to be better thanks to her better financial market, strength in business

sophistication and functioning of institutions.


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Table 16: Ranks of South Asian Economies in Global Competitiveness, 2012-2013

Issue

Banglades

h India

Nepa

l

Pakista

n

Sri

Lanka

Overall Competitiveness 118 59 125 124 68Institution 127 70 123 115 49

Infrastructure 134 84 143 116 62

Macroeconomic

Environment 100 99 56 139 127

Health and Primary

Education 103 101 109 117 44

Higher Education &Training 126 86 128 124 79

Goods Market Efficiency 95 75 121 97 57

Labour Market Efficiency 117 82 125 130 129

Financial Market

Development 95 21 91 73 42

Technological Readiness 125 96 129 118 89

Market Size 47 3 95 30 64

Business Sophistication 108 40 127 78 31

Innovation 130 41 133 77 58

Source: World Economic Forum (2013)

7.2 Key Constraining Factors at Macro Level

There is a broad agreement among the South Asian entrepreneurs as regards key constraining

factors that undermine competitiveness. According to the GCR, entrepreneurs of India found

inadequate infrastructure as the topmost obstructing factor for their businesses followed by

inefficient government bureaucracy and widespread corruption (Table 17). Despite the

improvement in trade facilitation process at border points and increasing use air, rail and

waterways in transporting goods in South Asia, efficiency in time use did not improve so much

since 2005 average time for export has reduced only three days while average time for import


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has reduced by ten days. The major inhibiting factors for Sri Lankan entrepreneurs, on the

other hand were found to be high tax rates and complex tax regulations. In general, successive

GCRs indicate that factors which are often referred to by entrepreneurs are inadequate

infrastructure, inefficient government bureaucracy, corruption, policy instability and

government instability etc.


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Table 17: Top-3 Major Constraints Confronting Businesses in South Asia: 200

Country

2007 2009

Top 1 Top2 Top 3 Top 1 Top2 Top 3 Top

Bangladesh

Corruption

Inadequat

e supply of

infrastruct

ure

Inefficient

governm

ent

bureaucr

acy

Inadequate

supply of

infrastructur

e Corruption

Inefficient

governm

ent

bureaucr

acy

Inadequ

supply o

infrastru

e

India

Inadequate

supply of

infrastructur

e

Inefficient

governme

nt

bureaucra

cy

Restrictiv

e labour

regulatio

n

Inadequate

supply of

infrastructur

e

Inefficient

governme

nt

bureaucra

cy

Corruptio

n

Inadequ

supply o

infrastru

e

Nepal

Government

instability/co

ups

Policy

instability

Inefficien

t

governm

ent

bureaucr

acy

Government

instability/co

ups

Inadequat

e supply of

infrastruct

ure

Corruptio

n

Governm

instabili

ups


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Source: Global Competitiveness Report, Various Issues

Pakistan

Inadequate

supply of

infrastructur

e

Inefficient

governme

nt

bureaucra

cy

Corruptio

n

Government

instability/co

ups

Policy

instability

Corruptio

n

Governm

instabili

ups

Sri Lanka

Policy

instability Inflation

Inefficien

t

governm

ent

bureaucr

acy

Tax

regulation

Access to

financing Tax rates Tax rate


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7.3 Key Constraining Factors at Micro Level

At the micro level, businesses face a wide range of problems which start from starting the

businesses and its operation (Table 18).9 It is to be noted that, over time significant

improvements have been observed in starting a business in South Asian in terms of reduction

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