Toward greater resilience and sustained growth in South Asia

Ten years ago, Northern Bangladesh was hit by severe and relentless monsoon rains. The rivers burst their banks, hundreds of villages went under water, entire crops were lost, half a million people were made homeless, and millions more were affected in other ways. Households in the impacted regions faced rising food insecurity. The rural poor migrated but this helped them recover only 22 percent of their lost household consumption. 

Such disasters have become increasingly frequent and more intense in South Asia due to climate change. On average, 60 million people a year have been affected by natural disasters since 2010. Disasters like these can wash away a country’s ability to unlock its development and economic potential in a matter of weeks. Slow job creation and fragile fiscal positions inhibit South Asian countries’ ability to prevent and recover from such crises. Weak labor markets can stand in the way of households shifting out of agriculture as climate shocks take their toll. Fiscal constraints make it difficult to finance necessary public sector investments in climate adaptation. And although growth in the region is likely to remain strong in the short run, it has been below pre-pandemic averages, except in India. 

In the face of such challenges, how can South Asia build greater resilience and sustained growth? Our new report South Asia Development Update—Jobs for Resilience—focuses on three key areas necessary for a brighter future: robust private investment, vigorous job creation, and an environment that facilitates climate adaptation by households, farmers, and firms.

More than in other regions, growth momentum in South Asia has been driven by the public sector while private investment growth has slowed sharply. But without a thriving private sector, job creation is likely to continue on a weaker path than in other emerging market and developing economies, especially in non-agricultural areas. Employment growth has not kept pace with the rise in the working-age population. The region employs only 59 percent of its working-age population compared to 70 percent in other emerging market and developing economies. It is the only region where men’s employment-to-working-age population ratio has fallen since 2000, and all but two South Asian countries rank in the bottom quartile when it comes to women’s employment-to-working-age population ratios.

The region has a youthful workforce. If South Asia could employ as large a share of them as other emerging market and developing economies, without losing productivity momentum, its output might be 16 percent higher.

The key to inclusive, resilient, and strong growth in South Asia lies in the potential of the private sector. Ultimately, private investment and robust firm growth are necessary to create the jobs required to absorb a growing working-age population. They are also needed to spur the adoption of new technologies for climate change adaptation.

Our report offers a policy agenda for shaping prosperous and resilient economies in the region for the decades ahead.

• Improve fiscal positions. Current growth may become less sustainable in the long run given rising debt burdens and high interest rates. Low revenues severely constrain government spending on critical priorities, including climate change adaptation. Increasing tax revenues and pivoting towards less distortionary taxation is essential for freeing up fiscal space to meet upcoming challenges.

• Spark acceleration in private investment. Private investment growth still has not reached its pre-pandemic averages across South Asia. A sustained acceleration in private investment is needed to meet development and climate goals. Countries’ increased openness to trade and capital flows and improved institutional quality can boost the likelihood of this acceleration.

• Spur firm growth. Demographic shifts could lead to a “demographic dividend,” provided the growing working-age population is productively employed. More dynamic non-agricultural sectors are necessary to reallocate labor into more productive activities. Weak employment trends in part reflect longstanding obstacles to firm growth: a challenging business environment, inefficient land markets, labor market and product market restrictions, and gender inequality.

• Invest in climate adaptation. Governments must adopt adaptation strategies today to improve resilience to future climate disasters. These include investments as well as supportive policy environments. One of the most effective adaptation strategies is the provision of broad public goods: connective infrastructure, robust social protection, and effective public services in critical areas like water and health. Roads and bridges, local clinics, piped water—these and other investments generate double dividends, improving productivity in good times while building resilience in bad times.

The quest for broad-based prosperity and resilience in South Asia will take time and effort. But if we focus on the right investments and policies now, it will pay out over the decades to come.