Eliana Cardoso's blog

The future is unpredictable and yet, from time to time, we must take stock of what we accomplished and where we are heading. Over the past decade, better policies and rising integration with the global economy have pushed growth in South Asia upwards. By 2007, the peak year just before the global financial crisis, the region’s GDP growth had reached nearly 9 percent a year (just slightly behind East Asia’s). This growth acceleration extended to all the countries of the region.

The global financial crisis took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). This was the smallest growth decline among all regions of the world and the prospective recovery is already underway. The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.

Dipak Dasgupta, a Lead Economist at the World Bank, points to four key factors that have cushioned South Asia’s growth decline during the crisis and are helping in the strong recovery.

(1) Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.

(2) The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.

“Did you kill somebody tonight?” Durga Pokkherel asks the police officer while in police custody in Nepal, after hearing terrified screams. As told in her memoir, Shadow over Shangri-la, the police officer replies: “You always imagine something big. He is not killed. As a routine treatment he was enclosed in a sack and beaten. But he would not speak a word, so some other police friends put a couple pins in his fingers. That is all.”

The dialogue took place in late 1990s, when both Maoists and the state committed human rights abuses in Nepal, a country on the top of the world, where caste, ethnicity, gender status and regional disparities have largely determined inequality. Social exclusion fostered state fragility, a Maoist rebellion, and a civil war that lasted for ten years (1996-2006).

After an unpopular royal coup in February 2005, the international community put pressure on the government to accept international monitoring under the UN Office of the High Commissioner for Human Rights. The monitoring created the space for peaceful political protest and, in April 2006, the King restored Parliament. Civil war came to an end with elections and the declaration of the Federal Republic of Nepal in May 2008.

I am old enough to remember the days when Latin America was the land of inflation. Hyperinflation in Bolivia, Brazil and Argentina made the news in the 1980s and early 1990s. At that time, Asia was seen as immune to the Latin disease. Since then, much water has gone under the bridge. Inflation came under control in the majority of Latin American countries. Today the median inflation rate in South Asia is more than twice the size of the median inflation rate in Latin America and the Caribbean. (See chart below)

Should South Asia’s policymakers look at this information and wonder whether they are doing something wrong?

In general, the recipe for hyperinflation is the monetization of budget deficits in countries afflicted by political instability or conflict. Even if the threat of mega inflation is far removed from the South Asia scenarios, the combination of big budget deficits and loose monetary policy seems to be present in some countries of the region.

One of the most extraordinary examples of the use of economic principles comes from the beginning of the 19th century, when England used to send a huge number of prisoners to Australia. The government originally paid the ship captain a pre-determined amount for each prisoner that boarded the ship, but half of them would die during the journey. In 1862, Edwin Chadwik, knowing that people respond to incentives, told the U.K. government to pay captains according to the number of prisoners that actually disembarked in Australia. With this adjustment, the survival rate increased from 50% to 98.5%.

This example illustrates how incentives can do wonders in some circumstances. Yet, human actions are not always guided by the same calculations made by a profit maximizing ship captain. Behavioral economists have emphasized that we respond to a deep ingrained sense of fairness. Culture and values are crucial in understanding human behavior and promoting healthy and stable societies.