Most of the economies of South Asia, especially India's, are often portrayed in comparative discussion as among the 'success stories' of the developing world in the period since the early 1990s. The sense that the Indian economy performed relatively well during this period may simply reflect the much more depressing or chaotic experiences in the rest of the developing world, with the spectacular financial crises in several of the most important and hitherto dynamic late industrialisers in East Asia and Latin America, and the continuing stagnation or even decline in much of the rest of the South. Compared to this, the Indian economy, along with the smaller economies in the region, was relatively stable and has been spared the type of extreme crisis that became almost a typical feature of emerging markets elsewhere.

Nevertheless, the picture of improved performance is misleading at many levels, since in fact both India and the entire South Asian region as a whole, experienced economic growth which was less impressive than the preceding decade. Further, across the region this growth was marked by low employment generation, greater income inequality and the persistence of poverty. In other words, despite some apparent successes in certain sectors, on the whole the process of global economic integration did little to cause a dramatic improvement in the material conditions of most of the population, and added to the greater vulnerability and insecurity of the economies in the region.

The countries of South Asia have strange relationships with one another. There is, of course, the uneasy and periodically violent interaction between India and Pakistan. There is the more complex attitude of all the smaller countries vis-à-vis India, along with the Indian government's own implicit perception of itself as the sub-regional power and Big Brother. There are the tentative and inchoate attempts of the various smaller countries to forge relationships with each other, overcoming histories of mistrust or alienation.

In all this, one widespread perception in the region is that each country is very different from all the others, not only in politics, history, culture and society, but also in economic structure and trajectory. But this perception is actually false, as even the most cursory investigation into economic processes in the region will reveal. It turns out that the very disparate countries of the region, which differ in size, resource endowment, particular social and political configurations, and patterns of constraints, nevertheless have a remarkable commonality of economic experience.

Thus, all of these economies share certain structural characteristics. These include: the presence of a high degree of underemployment; a strong dualism between organised and unorganised sectors, especially in manufacturing, which sometimes (but not always) translates into the dualism between large-scale and small-scale; the continuing significance of agriculture as a major employer; the emergence of services as the largest employers, often as a refuge sector; the involvement of by far the larger share of the workforce in what is essentially low productivity employment.

But in addition to these, what is more noteworthy is the apparent synchronicity of policies and processes across the region, despite very differing social and political pressures. All the economies of the region had import-substituting industrialisation strategies for the first few decades after independence, with the attendant development of some industry and associated dualism in the economy, as well as regulation of much economic activity.

From the 1980s onwards, all of them moved, to varying degrees, to a strategy of development based on export-orientation, liberalisation and privatisation based on the market-oriented neo-liberal economic paradigm. The process could be said to have started in South Asia with the Sri Lankan government of Jayawardene moving towards liberalisation and dismantling the earlier universal food security system, in the late 1970s and early 1980s.

Subsequently, and more strongly in the early 1990s, all the governments in the region (barring that of Nepal, which had a different situation) went through fairly comprehensive policies of internal and external liberalisation, reduction of direct state responsibility for a range of goods and services and privatisation. While we in India may perceive specificity in our own reforms, there was still a remarkable degree of similarity even in the design and pattern of these neoliberal economic strategies across the region.

By the turn of the 21st century, most of the important economies in South Asia had undergone the following changes:

This commonality of policy experience meant in turn that outcomes were also quite similar, despite the very different initial conditions in different economies.

First, the evidence points to increasing inequalities of income in all the economies of the region. These growing inequalities are evident in terms of differences between rural and urban residents; between households in various-size classes of expenditure; between sub-regions within countries. The widening of income gaps has also in some cases been associated with increased social and political tensions in the region, which may be expressed not so much in direct demands for redressal of income imbalances, but in terms of other ethnic, social, cultural or regional demands.

Second, across all the countries in the region there has been deceleration of employment generation, compared to previous periods. This has occurred despite a slight improvement, or at least the same trend level, of growth in aggregate economic activity. In all the countries in South Asia, employment generation has not kept pace with the increase in population, and in several countries (such as India and Pakistan, for example) this has expressed itself not only in higher rates of unemployment and underemployment, but also in declining labour force participation, which is not fully explained by increased involvement in education.

Third, in most of the countries in the region, there has been stagnation or increase in levels of poverty as defined by the head count ratio. India is the only country where the data are ambiguous on this matter, but even here, plausible estimates suggest that while poverty has declined somewhat over this period, the rate of decline has reduced compared to the earlier periods. Such evidence on poverty across the region is broadly in conformity with the evidence on widening inequality and decelerating employment that has already been mentioned.

Fourth, the relative decline of manufacturing, especially in the small scale sector, and the stagnation or decline of manufacturing employment, is marked across the region, with the exception of Sri Lanka. In different countries of the region, agriculture and or services appear to have become residual refuge sectors for workers who cannot find productive employment in industry; in India, however, even agricultural employment has declined. Across the region, there appears to be relatively little link between rates of aggregate economic growth and total employment generation in the recent past.

Fifth, in all countries of the region the quality of employment appears to have deteriorated, with an increase in casual and part-time work, as well as greater fragility of contracts and indications that day labourers find fewer days of work. Real wage rates have typically stagnated in most countries; certainly wage share of income has declined in all countries.
These patterns of growth and employment observed in the different economies of South Asia since the early 1990s, call into question the arguments advanced by the advocates of neo-liberal reform, that there is a direct link between such reform and economic growth. Such a link tends to be based on the premises that both internal deregulation and external liberalisation spur private investment, that curbing public investment is beneficial for aggregate growth because otherwise it tends to 'crowd out' private investment, that privatisation delivers assets to those who are likely to make socially more desirable use of them, and that private agents acting on their own will deliver both more efficient and more dynamic outcomes.

This optimistic perception ignores the widespread evidence of market failure, at both microeconomic and macroeconomic levels, as well as the strong evidence of close positive links between public and private investment. There are obvious reasons why such an argument therefore would not hold over either short run or longer run time horizons, especially in developing economies such as those in South Asia.

Given the unequal asset and income distribution that exist and the consequent limited nature of the home market, private investment would come up against a demand constraint fairly rapidly. This would be aggravated when the type of private investment that occurs does not generate that much employment, as is likely when the investment is in sectors catering to richer consumers with production involving high import content or more capital-intensive technology.

Public investment in developing countries tends to have strong positive linkages with private investment, not only because of the standard Keynesian mechanism, but because it also operates to ease infrastructure and other supply constraints, making private production easier and cheaper. Therefore, a strategy based on reducing public investment and hoping for deregulated private investment to fill the gap, could well be expected to generate lower aggregate investment and growth trajectories than one which allows for an important role for public investment.

This argument is actually borne out by the experience of almost all the countries of South Asia that have been briefly discussed above. As we have seen, by the turn of the decade, governments in the region had already achieved major liberalisation and deregulation in many important areas of the economy.

Thus, internal and external trade were almost completely liberalised in all the countries of the region by 2001. Domestic deregulation especially for large capital was extensive and provided much greater freedom to private investors in general. Attempts to control the fiscal deficit in order to prevent 'crowding out' of private investment meant cuts in government productive expenditure and substantial reduction in the 'primary deficits' (that is, net of interest payments). Many cases of privatisation of public assets were pushed through even at rock bottom prices.

Despite all this, if growth still tended to slacken, the problem obviously lay to a substantial extent with the neoliberal reform process itself. And this was manifested in the fact that in aggregate terms the reform process did not generate either higher rates of investment in the aggregate or increases in the productivity of such investment.

In India, the rate of growth of aggregate GDP in constant prices has been between 5.5 per cent and 5.8 per cent in each five-year period since 1980, and the process of accelerated liberalisation of trade and capital markets did not lead to any change from this overall pattern. Indeed, recent years have witnessed a decline in average GDP growth rates to less than 5 per cent per annum. More significantly, the period since 1990 has been marked by very low rates of employment generation. Rural employment in the period 1993-94 to 1999-2000 grew at the very low annual rate of less than 0.6 per cent per annum, lower than any previous period in post-Independence history, and well below (only one-third) the rate of growth of rural population. Urban employment growth, at 2.3 per cent per annum, was also well below that of earlier periods, and employment in the formal sector stagnated¹. There has been, for the past two years, a severe crisis in the agriculture sector, as cultivators have been hit by the threat of import competition from highly subsidised imports, which have kept prices low, even as they struggle to cope with higher costs because of cuts in domestic input subsidies.

Other indicators point to disturbing changes in patterns of consumption. Thus, per capita foodgrain consumption declined from 476 grams per day in 1990 to only 418 grams per day in 2001². The National Sample Survey data also suggest that even aggregate calorific consumption per capita declined from just over 2200 calories per day in 1987-88 to around 2150 in 1999-2000. Given the aggregate growth rates and the evidence of improved lifestyles among a minority, this points to substantially worsening income distribution, which is also confirmed by national survey data³. Meanwhile, declining capital expenditure by the government has been associated with more infrastructural bottlenecks and worsening provision of basic public services. All these features: decelerating employment growth, declining access to food for ordinary people, and worsening coverage and quality of public services, have had particular impact upon the condition of ordinary women.

The major positive feature which is frequently cited, that of the overall stability of the growth process compared to the boom-and-bust cycles in other emerging markets, reflects the relatively limited extent of capital account liberalisation over much of the period, and the fact that the Indian economy was never really chosen as a favourite of international financial markets over this period. In other words, because it did not receive large inflows of speculative capital, it did not suffer from large outflows either. Meanwhile, stability to the balance of payments was imparted by the substantial inflows of workers' remittances from temporary migrant workers in the Gulf and other regions. This has amounted for more than all forms of capital inflow put together.

While the Indian experience of the recent past is not reflective of the impact of external debt, it does indicate one crucial aspect of the explicit policy of wanting to attract capital inflows of all forms into the economy. While the actual inflows have not amounted to much, the apparent desire to attract and maintain such inflows has led to significant constraints on government policy. In particular, there have been (self-imposed) limits on fiscal expansion. This has had unfortunate implications, especially in the past two years, which have involved hardly any increases in the state's productive expenditure, despite domestic recession, unemployment, crisis in agriculture, and clear signs of slack in the form of high surplus holdings of food grain and large foreign exchange reserves.

In other countries of the South Asian region, the economic growth experience subsequent to liberalisation has generally been even less impressive. In Pakistan, average annual growth rates plummeted in the 1990s, compared to the earlier decade, by about one-third. The deceleration in growth was associated with historically low rates of investment, as private investment failed to pick up and counterbalance the decline in public spending.

Industrial growth rates almost halved from 8.2 per cent to 4.8 per cent per annum. The earlier success at reducing poverty was reversed in the 1990s, as the per cent of households living in absolute poverty increased from 21.4 per cent in 1990-91 to 32 per cent in 2000-01. By June 2001, therefore, 40 million Pakistanis were living below the poverty line. Unemployment rose, real wages fell and income distribution worsened. Human development indicators, which were poor to start with, worsened over this period. Several analysts have blamed this on the single-minded pursuit of the government's economic managers to achieve stabilisation targets a la the IMF at the cost of growth and poverty alleviation.

The past two years have involved even more economic volatility, although here military instability in the region, including the U.S.-led war on Afghanistan and the build-up of troops along the border with India, could have played a role as well. Recent geopolitics has impacted in different ways upon Pakistan's economy. The desire of the United States to use Pakistan as an ally has meant the waiver or rescheduling of some external debt, which provides short-term relief but implies future problems. However, uncertainty and instability in the region has also meant falling domestic and external investment.

In Bangladesh, while aggregate growth rates over the 1990s were marginally higher than in the earlier decade, the overall incidence of poverty (at around 45 per cent of the population) has been stubbornly resistant to change. Indeed, the rate of poverty reduction slowed down after 1994-95, because of both lower growth of production and lower employment generation. Industrial growth was positively affected by the expansion of the export-oriented textile sector (taking advantage of previously unutilised MFA quotas) in which most workers are young women involved at the lowest end of a global manufacturing chain. But other than textiles and garments, most manufacturing sectors have stagnated or declined. Such employment growth as there has been has occurred in agriculture and services sectors, mostly in informal activities. Industrial employment has been stagnant, and the entrenched dualism in the labour market continues.
All the productive sectors in Bangladesh have been adversely affected by trade liberalisation in India, given the porous border, which allows for the possibility of substantial smuggling. Thus import penetration has adversely affected production and employment in both agriculture and most manufacturing, and even sectors of rural economic diversification such as livestock and poultry rearing. Income distribution worsened over the 1990s.

The economy of Nepal has been similarly affected by Indian trade liberalisation because of its open border with India. Growth in the productive sectors has been weak, especially in agriculture where the removal of subsidies was not accompanied by public investment in rural infrastructure. In Sri Lanka, relatively low growth in the 1990s (especially in the agricultural sector) was associated with high macroeconomic imbalances, high trade deficits and reduced employment generation. Domestic political strife and the state of war in the North were only partly responsible for this; an important role was played by the decline in value of agricultural exports, the mainstay of Sri Lanka's economy.

Throughout the region, therefore, the process of increased integration with the global economy was not associated with higher GDP growth or more productive employment generation, or improved performance in terms of poverty reduction. Rather, employment possibilities became more fragile and there were clear income distributional shifts towards increased inequality. In all the countries, the combination of attempts to impose “fiscal discipline” by cutting public expenditure resulted in adverse consequences for producers as well as reduced quality and quantity (in per capita terms) of physical infrastructure and basic public services. The loss of revenues from import tariffs, the associated necessary declines in domestic duties, and the need to provide incentives to capital through tax concessions, all led to declines in tax-GDP ratios across the region, further reducing the spending capacity of the governments.

All the governments in the region now recognise that employment generation has been a major failure of the reform process so far. In fact, increasing employment generation is now the explicit concern in most of recent planning and policy documents that have been published in the region.

It is strange, however, that while the explicit goal has changed from growth in itself to employment generation, the strategies that are supposed to achieve this essentially involve further doses of neo-liberal marketist reform, rather than policies that would directly affect employment. Thus, most of the policy statements refer to further privatisation, further deregulation of domestic economic activity, further financial liberalisation and external capital account liberalisation, and further restrictions on fiscal policies.

These are precisely the set of policies that, as observed already, have been associated with deceleration of employment in the past decade. If employment generation is to be the focus of the new policy thrust in the region, then it would actually require a rethinking of these policies, towards more active state intervention in terms of supporting employment-intensive activities through a range of trade, fiscal and financial measures. Without such active involvement, aggregate employment in the region is likely to continue to stagnate, and may even deteriorate with further doses of neoliberal reform.

If such have been the consequences of the process of global integration, adversely affecting the material circumstances of the large bulk of citizenry in the region, what has influenced government policy in all these countries to make the neo-liberal economic strategy so inevitable nonetheless? What was the domestic political and social support for the process of liberalisation, which made it fit so neatly into the requirements imposed by international imperialism? Obviously, the political economy processes involved are complex and vary from country to country. But some idea may be had from a more detailed consideration of the Indian experience.

One of the interesting features of the political economy of the Indian strategy of liberalising economic reform has been the initially conditional and subsequently more unqualified support extended to it by various elements of the large capitalist class and other social groups which have substantial political voice, such as middle class and professional groups. To some extent this can be explained by the proliferation and diversification of the Indian capitalist class that took place during the years of import-substituting growth and later. There were three factors that led to this. The first was related to the process of introduction of new products and markets. In India over time there were a number of areas outside the traditional bases of existing monopolistic groups, such as trade, finance, services of various kinds and operations abroad by Non-Resident Indian groups, which served as sites for primary accumulation of capital.

Over time, groups that had accumulated capital in this fashion sought to diversify into manufacturing, not only by entering new niche markets, but also by investing in large capacities in industries characterised by economies of scale. This created a direct challenge for several of the traditional monopolies, which had in the past been protected by the barriers to entry created by the government's industrial and trade policies. The new entrants welcomed deregulation and also, because of newer technology, were less averse to import competition.

Established large capital found its relative position worsening in the economy over time. To reverse this decline, it looked for new avenues, including expansion abroad through the export of capital and by moving into areas previously reserved for small-scale entrepreneurs. So even the established big businesses that were, to start with, the beneficiary of state controls of various kinds, began to chafe against these controls at a certain stage. Among certain other sections such as the agricultural capitalists the economic regime change met with qualified approval, though parts of it were objected to. Agricultural capitalists, while being hostile to the withdrawal of subsidised inputs and directed credit, favourably anticipated the prospect of exporting at favourable prices in the international market.

In the event, a substantial section of domestic capital was willing to make compromises with metropolitan capital on the terms that the latter demanded. It was, therefore, all for allowing metropolitan capital to capture a share of the Indian market even at the expense of the entrenched capitalists, not to mention the public sector, in the hope of being able to better its own prospects as a junior partner, both in the domestic as well as in the international market. It was thus in favour of import liberalisation, a full retreat from state interventionism, and accepting the kind of regime that metropolitan capital generally, and the World Bank and the IMF as its chief spokesmen, had been demanding.

Support for liberalisation was growing not just among a section of industrial and agricultural capital. A whole new category of an altogether different kind of businessman was coming up, containing those who were more in the nature of upstarts, international racketeers, fixers, middlemen, often of 'non-resident Indian' (NRI) origin or having NRI links, often linked to smuggling and the arms trade. Such private agents in any case did not have much of a production base, and their parasitic intermediary status as well as the international value of their operations naturally inclined them towards an 'open economy'. And finally, we should not exclude a section of the top bureaucracy itself, which had close links with the Fund and the World Bank, either as ex-employees who might return any time to Washington D.C., or through being engaged in dollar projects of various kinds, or as hopeful aspirants for a lucrative berth in Washington D.C. The weight of this section in the top bureaucracy had been growing rapidly, and its inclination naturally was in the direction of the Washington Consensus-style policy regime. Thus, quite apart from the growing leverage exercised by the international agencies in their capacity as 'donors', the internal contradictions of the earlier economic policy regime generated increasing support within the powerful and affluent sections of society for changing this regime in the manner desired by these agencies.

Besides this support from large corporate capital, the large and politically powerful urban middle classes, along with more prosperous rural farming groups, whose real incomes increased in the consumption-led boom of the 1980s, actively began to desire access to international goods and gave potency to the demands for trade liberalisation. And of course the technological and media revolutions, especially the growing importance of satellite television, imparted a significant impetus to the international demonstration effect, which further fuelled liberalising and consumerist demands.

One important social change, which was arguably influential in creating pressures for the shift in macroeconomic strategy, was the accelerated globalisation of a section of Indian society. Apart from the media, one major instrument of this was the postwar Indian diaspora. The 'NRI phenomenon', by means of which a qualitatively significant number of people from the Indian elite and middle classes actually became resident abroad, contributed in no small measure to consumerist demands for opening up the economy. The importance of Non-Resident Indians was not only because they were viewed as potentially important sources of capital inflow, but also because of their close links with (which in many cases made them almost indistinguishable from) dominant groups within the domestically resident society.

It should be remembered that while the liberalising reforms failed in the aggregative sense and also in terms of delivering better conditions for most of the Indian population, there was a definite improvement in material conditions for a substantial section of the upper and middle classes. Since these groups had a political voice that was far greater than their share of population, they were able to influence economic strategy to their own material advantage. It is in this sense that local elites and middle classes were not only complicit in the process of integration with the global economy, but active proponents of the process.

While the neoliberal economic reform programme entailed a changed relationship of government interaction with economy and polity, it was not a 'withdrawal of the state' so much as a change in the character of the association. Thus, while the state effectively reneged on many of its basic obligations in terms of providing its citizens access to minimum food, housing, health and education, state actions remained crucial to the way in which markets functioned and the ability of capital to pursue its different goals. Government and bureaucracy remained crucial to economic functioning at the end of the decade of reforms; in fact the overall context was one of greater centralisation of economic and financial power. Many had believed that a 'retreat of the state' and the exposure of the economy to the discipline of the market would cut out arbitrariness of decision-making and the corruption that is inevitably associated with it. It would streamline the functioning of the economy by making it a 'rule-governed system', though admittedly the rules of the market. What happened instead in the Indian economy during this period of neoliberal structural adjustment was an increase in the level of corruption, cronyism, and arbitrariness to unprecedented levels. The privatisation exercise became another vehicle of primitive accumulation by private capital as it acquired public assets cheaply. Precious natural resources, hitherto kept inside the public sector, were handed over for a pittance (and alleged 'kickbacks') to private firms with dubious objectives. With the wider corruption that increasingly pervaded the system, the 'discipline of the market' proved to be a chimera.

Across the South Asian region, indeed, and not confined only to India, the period has witnessed an increase not only in levels of open corruption but also in a decline in substantive democracy and acceptance of basic socio-economic rights of citizens. While the formal denial of democracy has been more limited (as in Pakistan) across the region, the states have in effect become more centralising and more authoritarian in certain ways, even as their ability to control events and processes becomes more tenuous.

It could be argued that the centralised, centralising and increasingly authoritarian state is in fact a necessary requirement for this type of liberalisation which is based more on external legitimisation (from foreign financiers and the perceived discipline of international markets) rather than on internal legitimacy derived from the support of the majority of its citizens. Such a change in the nature of the state may therefore be a fallout of the substantially increased income inequalities associated with liberalisation and the social and political processes that they unleash. These inequalities have accentuated certain longer-term structural features of South Asian societies, whereby more privileged groups have sought to perpetuate and increase their control over limited resources and channels of income generation in the economy. This, in turn, has involved the effective economic disenfranchisement of large numbers of people, including those who occupied particular physical spaces in rural areas, or were urban slum dwellers who constituted both the reserve army of labour for industrialisation and the most fertile source of labour supply for extra-legal activities. The basic disregard for 'rule of law' which has characterised economic functioning in most parts of Sout