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South Asia Rebounds

Eliana Cardoso's picture

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.

(3) FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.

(4) Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.

Despite this overall positive story, the dispersion of growth in South Asia is widening. Setting the Maldives (a country with weak fundamentals) aside, it is possible to separate South Asia countries into two groups. India, Bangladesh and Bhutan are recovering quickly from the crisis. Pakistan, Nepal, Sri Lanka and Afghanistan face a more difficult situation because of bitter conflicts. Sri Lanka and Nepal have come out of civil wars, which weakened their macroeconomic management, but the end of conflict carries the prospect of a peace dividend.

In contrast, Afghanistan has seen sharply ratcheting conflict and an earlier drought. Both create poor prospects for growth. Pakistan is the most difficult setting, where the conflict has sharply aggravated its already precarious fiscal and balance of payments situation.

The region as a whole now faces at least two big challenges: food price inflation and fiscal imbalances. 

Food price inflation is a major problem. The upsurge in global commodity prices preceding the global financial crisis had a strong negative impact in South Asia. While global prices have since declined sharply and disinflation was evident in the rest of the world, consumer prices have been under pressure in South Asia. In part, this reflects the lagged effects of higher food prices from global markets last year, and in part, the recent severe drought in India, which is forcing its imports higher and cutting back its exports. But consumer prices have been falling recently in other South Asian countries, such as Bangladesh and Sri Lanka.

"Large fiscal deficits are South Asia’s Achilles’ heel. Without gains in fiscal efficiency," says Dipak Dasgupta, "South Asia cannot meet its infrastructure and skills deficits." To complicate the situation, governments now have to deal with great volatility and uncertainties in the global context.

What should South Asian countries do? How do you think different countries in the region should respond to the current challenges?

Comments

Submitted by Dibya Raj Pokhrel on
As nepal is heavily depends on remittemce. The current receiving amount is past saving of workers . they are returming home due to crisis . the impact of this will reflect in near future so to minimize the impact of import back of unemployment, reduction in capital transfer ,the policy makers should focus for how to deal it. though nepal is passing through critical transitional situation . the main objective and focus of the state is towards the restructuring country, constitution writing and governence. Despite the political turmoil there are some hope to address the problem through monetory policy and fiscal policy as permanent government are doing well. The comparision and analysis should be based as the size of economy / GNI/ PPP and CPI which varies countries to country. Nepalse geo-political condition alway presurize toward the balace relationbetween two gaint of asia. The opportunity of lying inbetwee of them is yet to be grasp . The spillover impact of growth of neighbour countries might be seen in future but how it will be transfer ? the tale question remains always with nepalese country men.

To Dibya: I agree with you that the new constitution and progress in governance will be key for development in Nepal. I'll be visiting your country tomorrow. Cheers!

Submitted by Namiz Musafer on
During mid 2008, the crude oil price in the world market was at the peak and by now it has drastically come down. The South Asia region is a net importer of crude oil and for example nearly one quarter of spending on imports of Sri Lanka was on crude oil. Has'nt this factor helped South Asia to cushion against the global financial crisis?

You're right. A decline in fuel prices help the oil importers such as South Asia. They can now increase with the global recovery.

Submitted by Raghu Bir Bista on
World Financial Crisis is a serious economic issue. In the globalization, its effect naturally falls on South Asian economy. However, how much it is can not be quantified yet without any research on it. Just considering three indicators such as CPI, declining FDI and fiscal deficit, we cannot reach in conclusion. If we do it, again we are manipulating issue and driving our development process and efforts somewhere. Thus, I request first of all analyze seriously because • What is cause of CPI? In my observation, there are four major reasons: lower agricultural productivity and production and unproductive investment in land and labor shortage, along with political turmoil. In recent years, agricultural productivity and production has been declining in rural areas because of political turmoil and conflict trap. How much it is we need again information because 48 thousand household displaced and more than 1.5 million population conflicts affected. However, there is not rehabilitation and normalization process for it. Secondly, remittance investment is used more on productive land because the government has not protective policy and plan for productive land. These lands are being barrened. Thirdly, outflow of labor that is good when remittance comes has created skill agricultural labor shortage. Finally, the government cannot monitor the market hoarding. Therefore, CPI is not because of world financial crisis. • Fiscal deficit: in my observation, there are many causes: over political expenditure, growth of trade deficit and budget deficit, declining FDI and private investment. Firstly, in recent years, the growth of political expenditure in Nepal due to unproductive large size of constitutional assembly and non performing political tours and travels is not like as size of economy, instead of spending social and infrastructure development. Secondly, the conflict trap has not permitted to operate economic activities normally. Its result is slow export growth rate but aggressive domestic import demands (fuel). Its result is declining FDI and private investment to recover economic activities. • Linkages with financial crisis: there are three global linkages: labor, investment and trade. In my observation, FDI is less than 0.5 percent in accordance with Government Record. Share and bond price signaling doesn’t show such effect. In Trade, export size hasn’t much more significance because of slow industrialization. In labor outflow, its remittance can not play a productive role in Nepal. If it declines, it reduces unproductive investment. In my conclusion, small economy of Nepal has not much more linkages because of least global integration in different economic sectors. In case of Bangladesh, India and Sri Lanka, there are possibilities because of much more labor, commodity and financial market global integration. In case of Nepal, World Bank can do the following jobs. • World Bank South Asia has spent huge money for research and development. Reports have shown its weak performance and effectiveness, although World Bank has invested huge money in development programs, like as other International NGOs. This has made also confusion scenario on what should do. Therefore, World Bank should improve its performance in terms of efficiency and productivity. • In India, the government has adopted fiscal and monetary packages along with development stimuli program. In case of Nepal, the government is just political gossiping. In this side, the World Bank can make the government serious and sensitive for adopting anti financial crisis policy measures.

To Raghu: Thank you for such detailed and informative comments. Great.

Submitted by Phanindra Adhikary on
Remittances did significantly helped Nepal not only during the recent economic crises, but also through out the conflict period. Also that most people living in rural areas of the country are outside of the fundamentals of banking. Nepalese people do not rely on credit economy. Therefore this might also have worked as a cushion. However, remittances is likely to reduce in the coming year as a recent media report informs that Nepalese workers travelling to West Asia has reduced by around 10%. In my view, organization like the World Bank will need to focus on helping the Government of Nepal to implement programs that brings alternative instead of relying soley on remittances. Larger food crises is looming the region including Nepal. WFP forecasts well over a three-million people will be facing food shortages during the winter. Agriculture land has not been used to its fullest extent due to conflict and current political transformation process. Therefore, investment towards increased agriculture production and use of agro-based produces as income generating activities for the rural poor will help to revive the economy gradually. Labour-based irrigation program will help to increase employment opportunity. Increased agriculture production will also help to reduce our reliance on remittances as well as that the remittance incomes will be used within the country. This will also reduce our reliance on food aid through WFP. As Nepal is undergoing transition, political stability will be key to the recommend approach. However, if we start from now then we can hope to be achieving our target within the next 8-10 years. Phanindra Adhikary Kathmandu, Nepal

To Phanindra: Thank you for your advice to the World Bank. We are listening and wil pay attention. Best.

Submitted by Amin Mahmood on
A lot of funds are pouring in from international financial institutions including The World Bank but have failed to yield the desired results. A lot of soul searching is required. Merely contributing it to the massive corruption prevalent in the society does not provide the solution. A critical analysis is required of the corruption cycle in Pakistan, in general, and in South Asia in particular. It needs to be noted that this malady has spread in all directions as a result of which in the current scenario it is now affecting both the public and private sectors. Apparently, corruption has now evolved into a vicious circle in which a large section of the populace is involved, with a majority involved in the practice based on the somewhat logical, yet unethical, argument that they need to cover the financial loss incurred by them as a result of extending illegal gratification to third parties for getting their own 'work done' by indulging in malpractices for similar monetary-cum-financial benefits when it is their own turn. Hence, the Government Contractor in connivance with the Project Consultant (both of them selected through non-transparent criteria) more than recover their 'investment' in government officials, by ensuring inclusion of exaggerated item-rates while preparing Rate Analysis/tender documents. The equipment and materials supplier ensures his pound of flesh by providing below specification (many times used) items of poor quality and make, as branded and made in 'USA'/ 'Europe'. Further dividends are shared between the main contractor and the supplier, with the Consultant more than happy to vet such deals for either a monetary consideration or in order to consolidate his position as the 'right' consultant in the relevant quarters. In this chain of events no one is really interested in quality. As a result, the end product not only fails to perform for the designed period but also generally becomes a financial liability in the very first few years. More loans are obtained from DFIs and developed nations in the name of 'upgradation and rehabilitation' of the original project, actually meaning thereby that poor procurement resulted in the collapse of the original works twenty years before the actual design life. The financial system of the country is near to collapse due to such loans (originally meant for better causes). Direct and indirect taxes are time and again increased. Those who can escape through further corruption whereas the poorer sections become more burdened and life goes on for some and ends for some far sooner. It is very obvious that the procurement strategies adopted by the Bank have failed to yield the desired results here. With monitoring and evaluation of such projects and loans provided by DFIs etc. left to local agencies, esp. at the micro levels, this is bound to happen. Hiring more ineffective 'Consultants' aloof of South Asian realities is not the answer. A major review is definitely required of the respective strategies urgently and till suitable capacity building has been achieved locally, financial institutions need to involve themselves in M&E, even if a small part of the loan has to be sacrificed for putting into such use. Although, this is probably beyond the normal working of the DFIs, however, it is most essential if such financing is required to yield the desired results, as yet in reality typed in Project Initiation Reports only. Otherwise, the local perception of such loans being merely political tools keeps strengthening with time.

To Amin: You point to very serious issues. They need discussion. We need transparent contracts and processes to keep confidence in government. And confidence is essential in restauring a peaceful environment in Pakistan.

Submitted by Shimrah on
The kind of situations and problems taking place in each south asian country is unique and has to adopt strategies that best suits each one. we can't create one and apply to all! Despite of differences in problems and issues in each south asian countries, the impact of global economy is similar for all! We can't deny the fact how global economy has destroyed local economy miserably! ... Read More The benefit of the global economy, many argue about, goes down to only some specific section, group, ruling class, and the capitalist! which is same case in all south asian countries.. The farmers suicide,vanishing agriculture sector, increased no. of people living below poverty line, hunger, poverty, no provision of basic neccessities and rights of each individual, no value of human lives, lack of opportunities n employment forcing people to migrate and earn at any cost, living vulnerable lives by the majority of the section in each south asian countries... we need to question and look into all such factors before naming which country's economy is good or which is bad!!! Almost all countries try covering up and say that there economy is doing great!! Hey, BTW, we shouldn't be so proud of remittances that we often talk about...we need to seriously reflect and understand how nepalese migrant workers are treated everywhere without respect and dignity! then we have to find viable solutions to solve unemployment issues!!! or make these migrant workers attain respect and dignity from the host country!1 we should never forget the pains and struggles wage by these nepali workers at any cost in their daily lives and the kind of problems and issues they have to confront daily!!! it's not at all an easy lives at all...

India is the strongest performer, but Indian companies would do well if they were to strike some collaborative arrangements with Chinese companies in the IT field and in textiles, instead of seeing these as competitors always. That way, they will rebound faster!

Submitted by Dr. M Aslam on
An interesting article on Pakistan by Aneel Salman http://www.southasiaanalysis.org/papers36/paper3519.html Pakistan’s Economic Outlook and Priorities in 2009 Pakistan, a fragile economy, has been facing both economic and political crisis which predates the global financial crisis. Inflation, trade deficit, balance of payment, foreign exchange reserves, circular debt, poor performance of the banking sector and Karachi Stock Exchange and political instability have remained the key indicators of Pakistan’s economic crisis. Political and economic stability compliment each other, Pakistan is an interesting case since both are in crisis. Even though it’s democratic, there is still a strong rift between its army and the civil government. The war on terror has become a hanging sword-- the rate of suicide bombing increasing alarmingly. ------------------- There is a general consensus among Pakistani economists; the 2008 financial crisis has not affected Pakistan with a huge blow, the country has seen some worse situations but still survived. The economic conditions were never promising given the corruption, short term policies and political instability. Given the diversity and seriousness of problems Pakistan should work on strict time lines. Short term policies deal with terrorism and debt, medium term policies deals with energy crisis, Foreign Direct Investment (FDI), and water management. Higher education, regional integration and defense budget reduction should be the long-term objectives of Pakistan. ----------------------- Time lines and Priorities Short-term In order to avoid a major economic crisis, Pakistan government should solve two top urgent problems, war on terror and heavy debt burden. Terrorism War on terror cost Pakistan $6 billion economic losses during 2007-08 and $10 billion losses during 2008-09. In July 2009, Shah Mahmood Qureshi, Foreign Minister claimed that the war on terror already cost Pakistan $35 billion. The insurgency resulted in massive capital flight from Pakistan to the Gulf. The whole country is paying a heavy price for its social instability. Without social stability, everything is just paper talk. Government of Pakistan needs to quell the intifada and eliminate terrorism. There is still time and we need to re-assess our plans and strategies. Economic and diplomatic tools need to be utilized along with military force against Talibans. The series of terrorist attacks have left little option for the Government except for an army offensive against the militants in South Waziristan. The operation is having spillover effects-terrorist attacks in the urban hubs of Pakistan. As our soldiers head into this “waster land” the Government needs to monitor the movements of local Islamic groups, increase their secret information networks and take proactive counter terrorism measures. One way to END this war is to block the supply chain of Talibans and reach the source which is sponsoring this terrorism. Without financial resources no terrorist can implement any plan. There need to be strictly control and monitor the financial flows sponsoring these activities. Debt Debt is another chronic ailment for Pakistan. Circular debt problem has arisen and is seriously impacting the operations of Pakistan’s whole energy value chain. Current account deficits, getting new loans to pay old debts, defense expenditure and non developmental expenditures has put the country in economic crisis. An effective method for debt relief is transparency and restructuring of tax system. Pakistan lost $10 billion on tax evasion in 2008. If there is improvement in tax collection, it will greatly offset the national debt and deficit. Medium-term Medium term policies for Pakistan deals with energy, Foreign Direct Investment (FDI), and water security. Energy Crisis For past few years, Pakistan is facing unprecedented energy crisis. There is a shortage of about 3,500 Megawatt (MW) in the electric power. The energy consumption of Pakistan’s per capita is only 15 MMBtu, as compared to the world Average of 68 MMBtu. It is essential for Pakistan to increase its per capita energy availability and consumption to at least 50% of the world level to about 35 MMBtu in the medium term (2012- 2020). To meet the growing demand of energy and the target of 9700 MW generation by the year 2030, of the Government should speed up work on alternative sources of energy which are (i) Mega Wind Power Projects, (ii) Biodiesel, (iii) Bio Gas Projects, and (iv) Small Hydro projects. The Government needs to focus on green energy initiatives and energy saving technologies. It should hold itself accountable in making payments to IPPs, and encourage solar energy panels for houses and businesses. Foreign Direct Investment (FDI) Foreign direct investment in Pakistan showed more resilience and stood at $3205.4 million during the first ten months of the 2008 fiscal year as compared to $3719.1 million in the same period in 2007, therefore showing a decline of 13.8 percent. To address this issue, mid-term policy should focus on the security situation and offer competitive environment to investors. Pakistan can become a lucrative parking place for foreign companies given its growth potential. Tax incentives and reduction in tariffs should be offered to foreign companies as this will not only increase the industrial base of the country, but also increase the employment opportunities and develop human capital. Water Security Water management is a critical issue for Pakistan’s development challenges. Food security, energy production, economic growth, human health- water is the nexus. Pakistan is under water stress, since 1950s, water availability has dropped from 5,000 m³ to 1,500 m³ per capita and is expected to become “water scarce” (below 1,000 m³ per capita) by year 2035. Water supply and sanitation projects are no more taken as priority even though there is more awareness. Major international institutions like OECD, World Bank etc have reduced their development assistance in this area. Given the complex problems like inter and intra water conflicts among provinces/ India, reduction in water table and climate change, Government of Pakistan need to think of sustainable solutions for water management. Solutions need to be developed keeping in mind the ecological, social and economic costs. Adopting both hard and soft path solution is the way to go. Hard path solution- A comprehensive strategy is required to come out of this crisis. Investments in the sea water desalinization, state-of-the-art water-saving / purify technology are required. Kala Bagh dam needs to be built to solve the energy crisis and water-conserving infrastructure available for agriculture. Soft Path solution is a well planned, centralized managed system with small decentralized facilities. It’s a need based approach, focused on quality rather than quantity. It improves the productivity of water by a built in conservation system and using water as per requirement. Better water resources management is the strategic "threat minimiser" in adapting to climate change, a global threat. Long-term Higher education, regional integration and defense budget reduction should be the long-term objectives of Pakistan. Higher Education Pakistan has tremendous potential in the field of higher education. Intelligent and strategic investments could translate into a thriving economy, mainly driven by the service sector. Government of Pakistan (GoP) initiated a plan in 2002 to improve the higher education with the aim of transforming the economy into a knowledge-based economy. Since then there has been a twenty four percent increase in the higher education budget and sixty percent increase in the science and technology budget. This has begun to show some positive changes, including an annual growth of 60% in the software industry. Pakistan is a neighboring country of China and India, both top outsourcing destinations and thus advantages due to auspicious geographic location could be leveraged. Nevertheless the GoP has to show more commitment in these sectors. Merely making fiscal investments and lack of a clear policy and political support could derail the whole process. Regional Integration/Defense Budget Reduction The total spending on education in 2009-2010 budget is 0.8% whereas defense spending consumes 12%. Uneven distribution of budget in development and non development sectors does not guarantee long term economic stability. The economic priorities need to be reassessed. Regional integration is a secret recipe for the reduction in defense budget. Trading blocks needs to be developed and the maxim “Trade not Aid” should be the new motto. Global work force is developed with this policy which assures economic sustainability. Given the current situation we do not expect miracles but strong diplomatic relations with India and China guarantee national security, equitable distribution of budget spending on other sectors and positive TOT and BOP.

Fully agree that short term Pakistan's Government priorities are to achieve fiscal consolidation, to eliminate terrorism and build a more peaceful environment at home and with neighbors. Regional integration should help, as you say.

Submitted by Anonymous on
Bangladesh is known as Democratic Country But as per article ( section ) 70 of the constitution of Bangladesh all power lies or centralize within single hand that is the Party Chief. Second one is very age old or left over Colonial Laws and Judicial System for ruling the people. Due to which hard earned cash money of common people are spend behind thousands and lacs of pending suits or litigation in the court which may not be settled even in life time not to speak off any certainty of result Now the question- who are direct beneficiaries for such Colonial laws which takes away valuable times of active life of both the contesting parties Trillions of Dollars are spent to conduct these long pending suits or litigation in the courts of Bangladesh every year . ARE THESE PRODUCTIVE ACTIVITIES ? If not why the colonial laws and legal system are not changes yet ? Experts are in opinion that in no way Bangladesh can face the current trend of advancement of Science and Technology like other Asian countries nearby Bangladesh Even Bangladesh will not be able to dream the face of digital world with existing Colonial Laws and Legal Patterns Third point which is most significant and important is the lack of accountability in every stage of life for people or for Government Personal / Officials

Submitted by Anonymous on
Bangladesh is known as Democratic Country But as per article ( section ) 70 of the constitution of Bangladesh all power lies or centralize within single hand that is the Party Chief. Second one is very age old or left over Colonial Laws and Judicial System for ruling the people. Due to which hard earned cash money of common people are spend behind thousands and lacs of pending suits or litigation in the court which may not be settled even in life time not to speak off any certainty of result Now the question- who are direct beneficiaries for such Colonial laws which takes away valuable times of active life of both the contesting parties Trillions of Dollars are spent to conduct these long pending suits or litigation in the courts of Bangladesh every year . ARE THESE PRODUCTIVE ACTIVITIES ? If not why the colonial laws and legal system are not changes yet ? Experts are in opinion that in no way Bangladesh can face the current trend of advancement of Science and Technology like other Asian countries nearby Bangladesh Even Bangladesh will not be able to dream the face of digital world with existing Colonial Laws and Legal Patterns Third point which is most significant and important is the lack of accountability in every stage of life for people or for Government Personal / Officials

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