Press Briefing: South Asia Region

Friday, September 15, 2006
Suntec Singapore
Press Briefing Room
Singapore
5:30 p.m.

P R O C E E D I N G S

MS. LAUTENBACH: I think we should start, everyone. We don't want to keep you waiting any longer. Apologies again. Apparently Mr. Wolfowitz had a quick meeting with journalists from the developing world who are attending the meeting, so we waited a little bit for them to catch up. So, thank you.

My name is Dale Lautenbach. I'm from the South Asia region of the World Bank. And we have with us today our Chief Economist Shanta Devarajan. Essentially what he's going to do is give you a little bit of a curtain raiser and a pre brief, if you like, on a seminar that we are holding tomorrow in the program of seminars, but obviously this is also a briefing focused on South Asia broadly. We have a couple of our country directors here in the audience who, if we have a tight question, we can turn to, Afghanistan, Pakistan Operations Director is here, so we have some experts beyond Shanta's expertise, which is vast.

We also have copies of his report to share with you. I'm going to ask Shanta to say a few words to introduce the notion of the reports to you, the seminar that will be discussed tomorrow, and then questions on that, on that theme, but also more broadly on South Asia, of course. We are not going to restrict you in any way. So, without further ado, having kept you waiting, Shanta, please.

MR. DEVARAJAN: Thanks very much, Dale, and thank you all for coming. The title of this report is: "Can South Asia End Poverty in a Generation?" And I think the title is deliberately chosen. First, let me just be clear what we mean by ending poverty because some people say, well, that is just a dream that we would never realize. In some sense, it is because we will never eliminate poverty for a long time. But I think we what we see is in South Asia today we have the potential, given the growth that the region as a whole has been experiencing of an average of 5 to 6 percent and in countries like India and Pakistan, 7 to 8 percent in the last couple of years, and the substantial poverty reduction that has been taking place of 9, 10, 11 percentage points. Nepal reduced poverty by 11 percentage points over the last eight years. We have the potential to bring the poverty rates in South Asia down to single digits and to achieve most of the Millennium Development Goals in health and education, goals like a universal primary education and equal number of girls and boys in primary and secondary school, a two thirds reduction in child mortality or a three quarters reduction in maternal mortality by 2015, roughly in a generation; and this would be an amazing achievement, if we can do it.

Now, I don't want to pretend that this is something that's going to happen automatically. It's a huge challenge, but it's something within our grasp, and the challenge is that there are at least four components of what needs to be done, what it's going to take in order to end poverty in a generation in the way we have described it. First of all, quite simply, this growth, we need to accelerate and sustain this growth from 5 to 6 percent up to about 8 percent, 8 to 10 percent, shall we say, and sustain it. That means keep it at that rate rather than having it go back down to pre 2005 levels.

And that, in turn, is not easy. First of all, as we all know, South Asia as a whole is suffering from a major infrastructure deficit. Every country, India, Pakistan, Bangladesh, Sri Lanka, Nepal, are all facing power shortages, blocked roads, congested ports, ineffective railways. There is a huge range of infrastructure problems that need to be addressed.

Just to give you one example of a country that has raced far ahead, in 1980 India had a larger infrastructure stock than China. That wasn't that long ago. Today, China's infrastructure stock is so much higher than India's that in order to catch up to the current level of China's infrastructure, India will have to spend 12.5 percent of GDP per year until 2015 in order to get to China's level today. That's four times what it's currently spending on infrastructure.

And more broadly, we all know that the costs of doing business, which is a major constraint to investment, are substantially higher in South Asia than it is, say, in comparable East Asian countries, including the one we are in right now. Singapore has the lowest cost of doing business in our recent cost of doing business study, and India ranks, I forget, 133rd out of 156 countries or something like that. What is it?

MS. LAUTENBACH: 134.

MR. DEVARAJAN: There is a big difference between 133 and 134, I assure you.

But that's only one part of the challenge, which is accelerating and sustaining growth. Let's not forget that even if we are able to achieve higher levels of growth, that inequality in South Asia has been increasing. This period of rapid economic growth has also brought with it a substantial increase in inequality. In India, the wealthier southern and western states are growing at three percentage points faster than the large northern states, the so called BIMARU states, Bihar, Uttar Pradesh, and so on. In Sri Lanka, my country, the richest quintile of the population, the richest 20 percent, increased their incomes by about 50 percent at the same time as the poorest 20 percent increased their incomes by 3 percent in per capita terms.

So, there is a widening inequality. And unless we address that, confront that directly, we risk having large pockets of poverty, of hundreds of millions of people, while the rest of South Asia grows very rapidly.

So, you really cannot end poverty in South Asia in a generation without addressing the problem of inequality and redistribution. But that's not the only issue. The other is human development. We definitely have to recognize that despite this growth, South Asia lags behind on various other dimensions of development, including health and education in particular. A country like Pakistan has a literacy rate of 57 percent, and a one in 10 children born in Pakistan dies before his or her fifth birthday. These are levels of human development that are just unacceptable if we think we are going to eliminate poverty in a generation, and there has to be a substantial decline in that. And then finally, the fourth challenge and one that has been discussed quite a bit already in these Annual Meetings is that of governance. We have that in various forms in South Asia. Conflict is a fact of life in countries like Afghanistan, and now it's coming up again in Sri Lanka, and Nepal faced it, has been facing a Maoist rebellion, which thankfully now seems to be subsided, and there are various conflicts in states of India, something like a quarter of the districts of India, according to Manmohan Singh, are facing a Naxaliite or Maoist movement.

So, conflict is a major obstacle to eliminating poverty in a generation in South Asia, but that's not the only part of the governance dilemma. There are also very high levels of corruption. Let's face it. According to Transparency International, Bangladesh is the most corrupt country in the world and has been there at that level for the last five years, and some of the other South Asian countries aren't that far behind.

And then we have various problems associated with the way politics is run in South Asian countries. Confrontational politics as we observe in Bangladesh often escalates to the point of political violence, and that would undermine security and in turn can undermine these people's ability to achieve a higher income for themselves and their families.

So, given these challenges, why are we saying that we can actually achieve ending poverty in a generation? It seems like it's almost an impossible task. Well, the key element here is that the growth that South Asia has enjoyed over the last 10 to 15 years, of this 5 to 6 percent growth, which is the highest levels of growth that they have ever had in South Asia, provides the political space in addition to some of the fiscal space, in order to undertake the policy and institutional reforms that are necessary to address the other four challenges that I mentioned.

Let me just give you one example. How do we get growth to accelerate? Well, in many cases and I mentioned the infrastructure deficit that South Asia faces, but the real deficit or the real problem that they're facing is that the policies undertaken in order to promote infrastructure are in a real mess. Pricing policies, you know, India, the same country that has these power shortages is giving free power to farmers in various Indian states, and the lack of operations and maintenance. You have a country like Sri Lanka that has a very dense road network, but nobody can drive on those roads because they haven't maintained them in decades because of the institutional incentives that get in the way of allocating funds for operations and maintenance as opposed to building new roads or building now buildings.

But the pressure that extra growth has brought is beginning to open up the space so that some of these reforms that are needed, like pricing reforms, are actually beginning to take hold. So, that's where I remain optimistic.

Let me just give you one example on that. On this free power to farmers, which we all know is an extremely costly policy, in some states about 1 or 2 percent of GDP is spent on these subsidies, but it's also not very equitable. It's not the poor farmers who benefit from it. It's the larger farmers who benefit from it. And finally, it's extremely insufficient. It leads to, again, that the power company is then unable to raise the resources to maintain it, and it also leads to a wastage of water and other environmental problems.

Now, just I was going to give you one example. Amarinder Singh, the Chief Minister of Punjab, actually recently reintroduced free power to farmers, and everyone, I think correctly, thought this was a big mistake because it was maybe going back down the road to the inefficiency of the past, but he introduced it in a very particular way. He said that this free power, these subsidies, are going to be financed out of the agricultural budget, so essentially the farmers now have a choice. They could get free power, or they can use those resources for agricultural infrastructure, for rural infrastructure, for roads and for rural electricity and irrigation.

So, in a sense what they're trying to do is to say, let's localize the cost of these subsidies. Now, we have to understand that these subsidies are not costless, and then say whether you want to use it as free power or use it for rural infrastructure.

So, that's one area where I see that there's potential for making major gains. But let me get to the redistribution, which is equally problematic. South Asia has a long history of failed redistribution programs. Sri Lanka is considered this paragon of equity and social welfare. Sri Lanka has a social welfare program. In fact, its only redistribution program, a cash grants program called "sumurdi." We have done some analysis that showed that 44 percent of the poor did not receive "sumurdi" benefits, and 40 percent of those receiving it were not poor. This is the only cash transfer program for the poor in the country.

India introduced this national employment guarantee scheme; right? Some other acronym. I forget now what it is. National rural, N R E G A, National Rural Employment Guarantee Act, which again some people have criticized for being profligate because it guarantees to no matter anybody who wants it 100 days of employment a year. On the other hand, this program is being scrutinized by everybody in the world. This program is being monitored almost on a daily basis, journalists like Ilna Podnarika are watching over it, and it's being evaluated by some of the experts, some of the leading figures in the world on evaluating poverty monitoring programs. So, it is possible that this program, even if it resembled some of the programs in the past is likely to be at least more effective and less costly or more cost effective than previous programs just because of the international scrutiny.

Third, on human development, it's now becoming extremely clear that one reason why South Asia has failed in terms of building human development as fast as it has been growing has been the poor delivery of public services; that services such as health and education, which are government responsibility, have been failing poor people in particular in South Asian countries.

And some of the results that I mentioned earlier are testimony to that. But there again, what I see are innovations in service delivery, such as in Nepal, the devolution of schooling to community management which is happening at a very rapid pace now in Nepal is actually an acknowledgement that central government driven education is not working.

Let's give it back to the people who actually care about their children's education, which are the parents in the local communities, and it's actually some anecdotal evidence is showing that it's increasing enrollments and lowering teacher absenteeism and various other dimensions of education. That, in turn, is being complemented by innovations and developments on the demand side because even if you improve the delivery of these public services, it doesn't help if nobody is coming to school, if nobody is sending their children to school. And there too, what we see is, first of all, economic growth on its own is increasing the demand for education. You see a huge increase in demand for education in Northern India and Pakistan. These are places that didn't have very high levels of education to begin with.

But you're also seeing incentives to increase the demand for education, probably the most celebrated of which is the Bangladesh Female Secondary School Assistance program, FSAP, which gives a scholarship to girls conditional on their attending secondary school, but also gives a stipend to the schools based on the number of girls they enroll, and this could be any kind of school, a private school, a public school, a madrassah, an NGO run school, and what you're seeing is a huge increase in secondary school enrollment. Girls are now outnumbering boys in secondary schools in Bangladesh, and an improvement in the quality of schools. Madrassahs are now trying to attract girls. There were no girls in Madrassahs before. Now it's something like 47 percent of the Madrassah students are girls in Bangladesh.

And then finally, the governance problems. Now, the way we look at the governance dilemma in South Asia is that we have to understand how South Asia, despite all of these governance constraints, as I said, Bangladesh has, according to TI, has the highest levels of corruption in the world. How they manage, nevertheless to grow so fast and improve human development so dramatically. This is what we call the Bangladesh conundrum or the Bangladesh paradox.

And then, if you try to unbundle this conundrum, you begin to understand that there are certain things that Bangladesh does exceptionally well, and you can build on those, and in particular what it has done very well is developed the voice of common citizens. What you find is that the NGO movement has not only delivered services, but has also acted as advocates for the voice of the poor, and you find that the microfinance revolution has not only provided microfinance, but it has created a sense of empowerment, particularly among poor women in Bangladesh.

If you can build on this, and by the way, the other thing that has happened in Bangladesh is a very active press and media that is playing a watchdog role, some people think maybe excessively, but certainly has acted as a watch on excessive government activities, particularly that hurt the poor. And the combination of these two can actually give us the potential not only to break down some of the governance constraints, but also make sure that development continues when there are problems on the governance side.

So, if I take all of this together, it really tells me that South Asia has the potential to end poverty in a generation, and more importantly, I don't think we should pass up this opportunity. There is a possibility that we can be complacent and grow at 5 and 6 percent a year, let some of these problems of inequality and low human development just fester. Some of them might come back to haunt us. As inequality widens, conflict might actually increase, and 10, 15 years from now we will look back and say we still have 400 million people living on a dollar a day in South Asia. But I don't think that's the choice we have. I think we have to grasp, seize this opportunity to address the problems frontally, and by "we" I mean not just the governments, but civil society, the private sector, academics, and the international community, grasp this opportunity and actually achieve the dream that we all share of ending poverty in a generation. Thanks.

MS. LAUTENBACH: Thanks, Shanta. If any of you missed all of the numbers he rattled off, we have a report which is richly exampled, and we'll give that to you afterwards. We will take questions. Please identify yourself and your media outlet at the start. Take the mike, please.

QUESTION: I work for the Associated Press.

You talked about how you have political space today to push forward what you called reform measures. One wonders how the situation has changed between, say, 2004, 2003, and today, for instance in India, which had already seen since the mid nineties a high growth rate, and you quoted about reduction in poverty, and still in two states, and Andhra Pradesh and Karnataka, the kind of reforms that you talk about have been carried out, and those two governments were wiped out in the elections. Where is the political space? We are talking about political space? Right or wrong, political space would bring to mind by watching what the popular mandate is all about.

MR. DEVARAJAN: There is no question that there was a reaction to many of the reforms that were undertaken by Andhra Pradesh and Karnataka. You are absolutely right. The fact is, though, that Andhra Pradesh and Karnataka, despite the fact that there has been a reversal in terms of governments, that a government failed and a new government came into power, continued to grow at 8 percent a year.

And the truth is that they have continued with some of the reforms. The free power was the most controversial one, and that one clearly "Vilasrao Deshmukh" got rid of free power. The opposition ran on a platform that if elected, they would reintroduce free power. They did, they were elected, they reintroduced free power, but yet Uttar Pradesh has managed by introducing a whole series of other reforms to actually contain the fiscal cost of the free power.

So, there are not simple solutions, these are not simple black and white policy and institutional reforms I'm talking about. They are very subtle and they are politically very sensitive. But what I find that both Andhra Pradesh and Karnataka have done is maneuver through a very difficult political environment in order to continue with the reforms. I mean, don't forget, AP, Andhra Pradesh, even though it has free power, is rated number one in the quality of the energy sector in India. It always wins the top of that race.

So, they are doing something right. Making up for the fact that politically, and you are absolutely right, there was a lot of pressure to reintroduce free power. And in fact, what they have done in AP is they reintroduced it as soon as they were elected, and then they slowly started targeting it more finally and finally, so that now we are down to just a small group of farmers who are benefiting from it.

QUESTION: You have mentioned about the social sector events in Bangladesh, and this is a no doubt a combination of two, but Bangladesh has also achieved a moderate growth of economy. How do you link this social sector achievement to the economic growth? And we are talking about most corrupt country, Bangladesh. If it is most corrupt country, how the country achieved this growth rate? Are we missing something?

MR. DEVARAJAN: The first question was easier. I will try to answer that first because I think the relationship between economic growth and social sectors is a very direct one in the case of Bangladesh, particularly because a lot of the growth came from two sources. One is the growth of the garment export industry, and the garment export industry, and that, by the way, was directly the result of economic policies. They created the bonded warehouse scheme, and they liberalized various other aspects of including foreign direct investment, and that enabled the government export industry to just boom, and it now employs two million women. And that has had a link because it has increased the demand for secondary education. Because now, when the employment opportunities for women has increased, and these employment opportunities in the urban areas, you are actually seeing an increase in demand for secondary education in rural areas after which they migrate to the urban areas with these jobs. So, there has been a back and forth, and there is no question that the secondary, the increase in secondary education then has had an effect on fertility; that a woman who has a secondary education will have 60 percent below the average number of children, regardless of her wealth, regardless of the income class. We see that there is an effect there. And the fertility decline, which in Bangladesh's case has really been quite dramatic, has had a favorable effect on economic growth.

Now, as I said earlier, on the famous Bangladesh paradox because I think let's be honest, it is a paradox. There is very high levels of apparent corruption. I keep saying perceived corruption because that's what Transparency International is measuring. And on the other hand, extraordinary development achievements.

And there are two or three aspects to keep in mind there. One is that the development and growth could have been even higher as if these constraints weren't binding, and I think the way we are seeing that now is the fact that Bangladesh is currently facing huge energy shortages. If you live in Daka, you know that power shortages are a daily occurrence, yet they are having trouble attracting foreign investment into the power sector because of the governance problems that the country faces. So, the governance problems may not have been binding in the past because you weren't facing these power constraints. Now, when you're facing the power constraints because of the growth, they're going to become binding.

But I think it's even more complicated than that because I think the relationship between weak governance and growth and human development are very different than the sort of standard model would predict. For instance, I think the Government of Bangladesh, whether implicitly or explicitly, recognized the capacity constraints it was facing in the early 1970s, which was a new government coming out of the revolutionary war, and so they decided that basically the government would not provide secondary education, and so secondary education today in Bangladesh is 98 percent provided by the private sector. It's financed by the government, but the government knows that it has constraints on delivering it. I mean, this is very different from India or Pakistan for that matter; that they actually made room, they created space for the private sector. And then, of course, the NGO story is legendary. They made room for the NGO sector to provide microfinance and health services. The NGO sector now provides about 50 percent of the health services in Bangladesh and Bangladesh has better health indicators than either India or Pakistan.

QUESTION: I'm rather interested to know about the reason behind these 5, 6 percent growth of Bangladesh, despite having this corruption.

MR. DEVARAJAN: I was trying to answer that. And as I said, the reason is that the same government that may be practicing large amounts of corruption is also one that has made space for the nongovernment sector in health services and education services. Then let me get to the growth directly.

Bangladesh was able there is plenty of corruption, say, in the customs department and various other departments we won't get into, but then when the government sector was beginning to start, they realized that if you will continue to work with the customs department, you would never get anywhere. So, they created a bonded warehouse scheme and completely insulated the development of the government sector from the customs department. So, right now, no matter how much corruption there is in the customs department, they can't touch the government sector because all the input for the government sector comes from outside the customs department. They come duty free. So there are ways in which you know, this government has shown and as I said, it may not be explicit, it may not have been a well thought through strategy, but the way it has evolved it actually is working despite the governance problems.

MS. LAUTENBACH: Thank you. Leslie, I will come to you. Gender balance here.

QUESTION: I would like to find out a little bit how the boom in China and India have brought along the region, and had enough on sex as far as migration, workers, et cetera, and reducing poverty. The other question is on Nepal. How do you think Nepal has come out of political turmoil? Has it fully recovered from that?

MR. DEVARAJAN: The Governor of Nepal Central Bank is here. Maybe he could give us some insights.

On India and China, I would make a couple of points there. The big impact of the growth of India and China has been on India and China. The effects of the growth of either on the other South Asian countries is actually quite muted, from a purely economic point of view. The fact is that the trade amongst South Asian countries is very low. In fact, South Asia is the least integrated region in the world. It's less integrated than sub Saharan Africa. So, the spillover effects could have been very large, but they just haven't happened. But keep in mind that India is such a large country that you are going to see most of the effects going on. For instance, there is a lot of migration within India that is occurring as a result of it.

That said, and let me segue, as the disk jockeys say, to the Nepal question, there has been an effect of migration, particularly of Nepalese into India, because agricultural wages have been raising quite rapidly in northern India, and that has led to large migration, and that is partly the reason why again the puzzle. You were talking about Bangladesh puzzle. There is a puzzle in Nepal too that how during a Maoist rebellion over eight years, poverty fell by 11 percentage points. I think a large part of that is due to migration and remittances that you find that the areas where there were large number of migrants, which is the western Nepal area.

QUESTION: Last year comprised of 16 percent of GDP, is quite high, so one thing about this year conflict with Maoists is that Nepalese were released in large numbers and the strain has continued. This led to higher rates than was before.

MR. DEVARAJAN: That's true.

Just if I could mention that remittances are also a big feature in Bangladesh, and that again is fueling some of the growth and the poverty reduction, and Pakistan as well. And Afghanistan, right.

QUESTION: Part of my question has already been asked, so the remaining part is, what do you think Nepal can do at least in the short run to try to make some of that growth that's taking place in India and China rub off? Because we stand right in the middle.

And the other question is: Isn't it time for the international development agencies to, in a way, start deconstructing big India and start talking in terms of states and little nation states in terms of development? Otherwise, your president is obsessed with sub Saharan Africa while the rest of the South Asian countries that could be close to them tend to be ignored.

MS. LAUTENBACH: The Africans this morning were complaining it was all about India and China.

MR. DEVARAJAN: And that Africa is lots of different countries, too.

QUESTION: Let's talk about South Asia.

MR. DEVARAJAN: Okay. Two questions there. What can Nepal do so that the growth of India and China can rub off on Nepal? There is not too much that Nepal can do. I think Nepal has actually opened up its trade with both India and China quite considerably, but I do think that internal stability and careful management of the domestic economy and creating incentives for the private sector to actually develop in Nepal and stabilizing the financial sector which is a challenge that the governor is facing on a daily basis, those do more for Nepal benefiting from India and China and, frankly, for growth in the rest of the world than anything that they can do just in terms of benefiting from India and China directly.

QUESTION: Actually, we should not forget that, given the large parts of the visit in India and adjoining states, Nepal has the highest potential in the world for something like 84,000 megawatt.

So, this project properly, if we could harness hydropower projects and being a buffer state between fastly growing India on one side and China on the other, there is very large scope for improvement in the services, given the difficult terrain we have in Nepal rising from zero to 29,000, there is ample possibility for development, including tourism and hydro. There are so many possibilities that have really not been tapped.

So, a second I argue that much of that depends on how much policies that we pursue in course of time, including the political stability and the financial sector development. Thank you.

MR. DEVARAJAN: Just a quick thing on your second question, in fact, the international agencies are thinking of India as a group of very different states as we do Pakistan for that matter and other parts these large countries because the variations are so enormous between Karnataka and Andhra Pradesh and some of the discussion I mentioned earlier about inequality in India is really about inequality between states.

But that said, the other thing that struck me when looking, studying India a little bit is the amazing inequality within a state in India, within Karnataka. Northern Karnataka and southern Karnataka are as different as any state in India is from the poorest state in India. So, we shouldn't just be complacent even by disaggregating it down to states. We have to be looking at regions within states, and that's the same thing in Punjab, Pakistan, for instance, for the difference between northern and southern Pakistan.

QUESTION: Don't you think, Shanta, that there are too many puzzles and too many dilemmas in the region, don't you think it's an indication that primarily these economies are auto driven and we don't really know what's happening in there? Like you said in Pakistan, the facts and figures, it's only the partial reality that is being reflected in the facts and figures and the numbers?

MR. DEVARAJAN: I don't think these countries are auto driven. There is no question. The fact you could argue about numbers at the less than one percentage point level. There is no doubt that growth in Pakistan has accelerated since 2000. You might want to say they can't make up the numbers that much so, once the growth has accelerated and there are also no questions there is a huge development challenge in Pakistan, there are huge problems with human development, with education, with health, and various and infrastructure deficits.

So, the question that I'm asking is, how can we leverage this acceleration of growth and the political space, as I mentioned earlier, that it creates in order to address these fundamental problems of human development, of inequality, and of weak governance? And what I'm seeing is that there are they're beginning to see glimmers of hope, that we can address them, and it's certainly much easier to address these problems when you're growing at 8 percent a year than when you're growing at 3 percent a year. There is that much more potential to get from it. And also, I think, having grown with 10 to 15 years' growth, you are finding that the people are beginning to demand a better life for themselves. They're beginning to see the potential for where they can grow.

MS. LAUTENBACH: I just to want mention the South Asian journalists, if they see me afterwards, I have an invitation to give to all of you, so before you slip out, come and see me. Ilna?

QUESTION: Shanta, can we talk about the role of the World Bank in India? From the moment I have arrived, I have been hearing how much India and China are growing and how other countries, not just sub Saharan Africa, but other countries in South Asia need the resources more. I mean, it's not being said, but it's almost there. It's implicit in what is being said. They need these resources more than a country like India does.

Now, in India, there is a feeling that while there is call or a need for policy advice, there is need for consultancy you call it "technical advice" or something like that there isn't that much of a need for money. You get a loan for $3 billion, we have reserves for $150 billion. Like, do we need it? That's the feeling most Indians have.

One, given the resources can be better used; second, given that we would perhaps need reports like yours and technical advice and consultancy and monitoring much more; and three, given that in India there is a political climate where you get a first opportunity you want to bash the World Bank. Doesn't all this come together where you need to rethink whether you actually want to give loans in India, with the line department sort of loans for education, for instance, for this and that? Thank you.

MR. DEVARAJAN: A couple of points. Maybe my colleague, John Roome, would like to answer some of these hard questions.

The first thing to keep in mind is already the World Bank's assistance to India of the IDA money that's the soft loan window, just a few quarters of a percent interest that money is already constrained. If this were an unconstrained world, India would qualify for a lot more IDA money than it actually gets because it has got a cap because it's a large country, and basically if you gave India how much it would qualify for, there would be nothing left for sub Saharan Africa. So let's be honest. We are already putting a cap on that.

And you're absolutely right: The amount of money that India gets from the World Bank as a percentage of India's GDP is very small, but I think you almost answered your own question. The key is how you leverage that little amount of money with knowledge assistance to have impact throughout the country.

So, we have a small loan, a relatively small loan, by Indian standards, for secondary for primary education, SSA, but that loan is combined with the Indian Government's own resources on primary education to undertake reforms of the whole primary education system, including, I might add, some technical assistance on the monitoring and evaluation side, which would, then again is not just monitoring and evaluating our own money, but evaluating the whole program. So, it's really a question of leverage. And I think the future role of the World Bank in India is going to be almost exclusively that, and at some point India will graduate from IDA, at which point, then, it T will be the relationship and that point, the only money that they borrow from us is what they want to borrow at pretty much close to commercial rates, so it will be like the way our relationship is with Argentina or Brazil today, which is they do borrow some money, but by and large what they're borrowing or trying to get is the technical assistance and the knowledge in order to leverage their entire program.

MR. DEVARAJAN: John, do you want to add anything?

MR. ROOME: I think Shanta covered most of it. I think the question.

MS. LAUTENBACH: This is John Roome, Operations Director for South Asia.

MR. ROOME: I think the real question is what kind of leverage comes from, and spillover effect you could get from the lending that the World Bank does do in India, and one is the kind of thing like the SSA that Shanta described, one, where we might have small project that the government might not otherwise do using their own resources to show something that could be done to then scale that up otherwise.

QUESTION: You talked about Pakistan's growth after 2000. Most of this growth is due to basically a lax monetary policy, interest rates coming down as low as 2 percent. Now that the interest rates have gone up by 5 to 6 percent, the growth has already been shaved off by 1 percent. The current account, the trade deficit is growing. The current account deficit is maybe unsustainable. This could lead to some kind of currency adjustment which will improve further. So, this is the dilemma we face. How do we work on that?

MR. DEVARAJAN: It sounds like a good question for my colleague, John Wall. John is the Country Director for Pakistan.

MR. WALL: First of all, what you call lax monetary policy was a very wise policy at the beginning of this decade, where interest rates were 16 percent, and there was fiscal liquidity and bringing those interest rates down during a period when there was vast underutilization of resources was the wisest thing to do, and that did get the growth going initially through exports and then through domestic consumption demand.

Now the situation you described is an overheated economy, basically, which does prevail, and you do need to raise the interest rates and need to depreciate the exchange rate. This will start putting some constraints on growth of credit and growth of imports, but I'm not sure that really translates into inevitably below 6 percent growth. I think there is a suppressed growth in Pakistan that came out of the very slow growth of the nineties, 3 percent growth over a decade, that and also that is Pakistan is catching up with not only in the short term, in terms of the years of the net capacity utilization going from 10 percent to 110 percent, but other more subtle effects. Plus, the liberalization that has taken place since, or actually I would say within the last 15 years, is allowing some integration of markets that didn't exist before, and that's the same kind of stimulus to growth occurring in China and India, and Pakistan should go along with that growth, but I'm not predicting continuation of 6 percent growth, but I don't think it's inevitably that by raising interest rates, depreciating exchange rate curbing monetary growth, growth has to slow down back to the 3, 4 percent level.

MS. LAUTENBACH: Thanks John.

QUESTION: This goes back to something we discussed earlier a few months ago on subsidies for the poor. The government these days is quite thrilled to have 8 percent.

MR. DEVARAJAN: This is Sri Lanka she's talking about.

QUESTION: And to achieve such high growth, but if infrastructure remains poor, subsidies weren't going down, negative interest rates, inflation is going up, and monetary policies have not been tightened further, and things are quite happy, but these things are there. Any thoughts? Because you were trying to push the subsidy scheme for the country.

MR. DEVARAJAN: Well, I think it seems to be a difference between the rhetoric and the reality in Sri Lanka as in some other countries because I think, while the government came into power with this "mayandechintino," they call it, which is the vision of the president, which focused on rural poverty and said that we need to increase the support to the rural poor because they had been left out of the growth process.

There is an increasing realization that subsidies that you don't solve that problem by just increasing the subsidies to the rural poor. In fact, those subsidies might actually cost the rural poor more than they are benefiting. I mean, one example is in Sri Lanka is a program of self sufficiency in rice which has led to farmers being constrained to producing only rice in certain parts of the country. Now, rice is highly vulnerable to weather conditions, and also there are much more lucrative crops such as tomatoes and fruits and vegetables that they can grow and make more money, but they are stuck producing rice.

Well, you could say these farmers are poor, so we should continue to subsidize them to produce more rice, or you could say let's get rid of all of the subsidies and try to give them some kind of level playing field so they could choose the kinds of crops they want to produce and then actually improve their incomes. I see the shift there where the government is beginning to rationalize some of these policies because they're beginning to realize that they can't afford these large schemes forever and ever for some of the reasons that you pointed out.

QUESTION: You have talked about subsidies in energy sector or tax on subsidy is a tax on poor consumers, but my feeling is that the World Bank seems to be less vocal about the influence by multinational internationalized companies and the oil producing nations. Then you talk about the subsidies by poor nations.

MR. DEVARAJAN: Well, we can be more vocal about the windfalls gained by oil producing countries, but we can't do anything about it; right? That's their windfall. So, there are lots of things we could be more vocal about in the global architecture, shall we say, but that doesn't generate any change. That's just rhetoric. What does generate change are policy reforms in the individual countries. So, while we can be very we can be annoyed if you're an oil importing country, you can be annoyed by all the high oil prices and the windfall gains going to oil producing countries. There is not much you could do about that, but there are things you could do about the fact that when you're subsidizing, say, diesel or gasoline in your own country, you're actually subsidizing rich people who drive cars and, therefore, taxing poor people who don't drive cars.

So, I think it's really a question of what you can actually do rather than what you can say that's important.

QUESTION: You talked about consistent growth, but the ease of doing business report released early this month ranked the region at the bottom. How would you rate this consistent high growth versus the poor performance in the region? I know in some countries have done well, but the ease of doing business which the private sector runs these economies, and how do you explain that?

MR. DEVARAJAN: It's a little bit like the governance paradox in Bangladesh, that by and large these constraints may not have been binding in the past, but now they can become binding in the future, as you grow. I mean, if you like, say, in Sri Lanka, for instance, Sri Lanka liberalized starting in the late seventies or early eighties, so there were a lot of low hanging fruit to be gained, regardless of the cost of doing business, and that's what they gained. So, the export industry boomed, the electronics boomed, there was tourism and everything else. Those weren't all that affected by the high cost of doing business.

Now that Sri Lanka is entering the second generation of growth, these costs of doing business, particularly in Sri Lanka's case, things like the labor laws and the labor regulations I mean, Sri Lanka has some of the highest costs of firing people. Take the severance pay: 75 weeks or something is the average severance pay for firing somebody in Sri Lanka. Now that's going to start biting. As the industry grows, it's no longer trade protection that's the binding constraint, but it might be employment that is the binding constraint, as some of the producers are facing. So, there is definitely a potential that this is going to be a binding constraint in the future. The other point is that despite the high levels of costs of doing business, some South Asian countries, not necessarily Sri Lanka, have actually been reforming quite rapidly, and Pakistan is a case where, from a very high level, they have come a long way, and that change is something that attracts investors, so you're seeing an investment that foreign investors as well as domestic investors actually accelerating investment when there is a big change in the cost of doing business, and that might bode well for the future as well in South Asia.

MS. LAUTENBACH: I think also, Shanta correct me if I'm wrong one of the ways to understand the rankings in the Doing Business is one of the measures is change year on year, so I think two years ago India was on top of the list because of change that had happened, and next year you don't change, you fall back down that particular list. So, the rankings have to be sort of deconstructed as well.

QUESTION: My question is, what is your observation about Nepal's different reforms, which is initiated and supported by the World Bank and IMF, especially the financial sector reform has been regarded as a failure, and idea was successful, but it is regarded as not because one study says once it is taken out, it will not be as successful.

MR. DEVARAJAN: Education, you said?

QUESTION: Education, yes, and schools and all that. So, what is your observation and lessons for other countries where you have supports? Thank you.

MR. DEVARAJAN: I'm going to ask the governor to weigh in on some of these, too.

I think Nepal has had major successes and some major difficulties in reforms. There is no question. I mean, trade liberalization, they undertook trade liberalization in the early 1990s. There was tremendous success, and the economy actually grew very rapidly in the early 1990s, but then some of the other reforms have stalled, and I think financial sector reform has been one of the most difficult, although there has been some progress in some areas, but there is the question of the defaulters and a few other things.

Education sector reform, I would I say, is more than just a question of subsidies. I mean, that's a fundamental reform that's going on, where not just the community managed schools, although that's a major part of it. The higher education reform, tertiary education reform, where during the difficult period there has been progress in terms of university autonomy and decentralization, that's actually going to have some long term permanent beneficial impact on the economy.

I think the lesson that this all tells us is reforms are deeply political. We should never forget that. This is not a technocratic solution. We could always write down the technocratic set of rules and policies to reform, but some of them will not work because of the politics. People will oppose them. And the most recent example being the energy crisis, removal of some of these energy subsidies, where it generated riots in the street and the government had to repeal them 100 percent all the way back to before the reform.

So, the one lesson we have to I take away from this is that reforms is not a simple matter of just figuring out what the subsidies should be or what the tax should be and then going ahead and implementing it. It's just a question of sequencing. It's a question of informing the public. It's a question of getting feedback from the public before the reform, getting a consultative process where that reform is an outcome of a domestic political debate beforehand, and that the voices that oppose the reform, even if there is a reform, will feel like their voices were heard rather than ignored completely.

MR. DEVARAJAN: Leslie?

QUESTION: I couldn't let you go without an Afghanistan question.

MR. DEVARAJAN: We have our expert here.

QUESTION: The question is how far has Afghanistan come in easing its chronic poverty, and how much do you think the escalating violence currently will set that back?

MR. MCKECHNIE: I think when you look at how far Afghanistan has come, it's certainly come a long way in a very short space of time, when we are talking of less than five years when the Karzai government took over; and during that time, the economy has grown by I think something like 85 percent, admittedly from a low base, but we are really talking of a country with double digit rates of economic growth. In fact, Afghanistan has the highest rate of economic growth in South Asia, and when this translates into the increase in per capita GDP, it's quite high.

Now, this is the legal economy. It's not something that excludes poppy or opium production because there are linkages between the poppy economy and the legitimate one. How does the violence affect growth? Well, firstly, it's a situation where part of the country is relatively peaceful. I mean, at least half of the country, and there are problems of crime, there are problems occasionally of flare ups between different warlords, but these parts of the country are relatively at peace, and then there is another part where there is a major insurrection going on, and clearly it is clearly very difficult for development to take place when there is a conflict going on. But nevertheless, one of the interesting things that's happened over the past six months is, I think, a greater realization of the need for a strategy that integrates security, development, and governance, and I think NATO are starting to do this in the South.

QUESTION: As far as the poverty goes, I mean, has the government come far enough to meet expectations, you know, of the population that peace would bring some sort of latest developments?

MR. MCKECHNIE: I think there is a large gap between the expectations of the population and what is actually being delivered not only by the government, because only 25 percent of foreign assistance goes through the government. The other 75 percent is outside the government budget provided directly by mainly bilateral agencies. But then, if one looks at what has actually been achieved, for example, take the national solidarity program where something like I think 12 to 15,000 of the total of 30,000 villages have held elections to elect village development councils, and this program can absorb 10 to $12 million per month in block grants going directly to villages to invest in infrastructure, schools, and other facilities.

Now, this is largely unseen, but is taking place. Microfinance has been very successful in growing quite rapidly. I could provide the numbers. I don't actually have them in my head, but it's interesting that 18 percent of the beneficiaries of the microfinance programs in Afghanistan are women. The rise in education in terms of getting children into school has also been very dramatic. The number of kids in school, I think at the moment is something close to 5 million, and the education system had virtually collapsed in 2000 and 2001.

Now, the attendance of girls at school varies. There are some provinces where it's very, very low. Other places where a very large proportion of the girls go to school, there are issues of educational quality that need to be addressed, but a lot of progress has been made, as I said, in a fairly short period of only five years.

MR. DEVARAJAN: Okay.

QUESTION: What are the numbers?

MR. MCKECHNIE: I think the economy has grown, I think it's between 83 and 85 percent since 2001, and the growth rates, we can provide them to you, have gone as high as 12 percent, 10, 12, and I think one year may have gone as high as 13, 14 percent.

MR. DEVARAJAN: I think I will wrap it up there.

MS. LAUTENBACH: Please come and get a copy of the report. There will also be a press release on the report on the press disk in about 15 minutes. Thank you, Shanta, very much.